How Do Student Loan Interest Rates Work? - Freshered
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How Do Student Loan Interest Rates Work?

Zoe Kramer November 6, 2022

One of the most difficult things to contend with when deciding to attend university is the price of your degree. Not only is it probably more money than you’ve paid for anything in your life, but the process of paying off your loans can be complicated and confusing. Especially with the government’s announcement that maximum interest rates are 6.3%, the whole process can be overwhelming. But don’t panic. Here’s how the interest rates work, in straightforward terms.

Which plan is your loan?

The first step to understanding the interest rates on your loan is knowing which plan you’re on. Plan 1 loans refers to loans taken out between September 1998 and August 2012 in England and Wales, or any time after September 1998 in Northern Ireland. Plan 1 loans pay the same interest rate, regardless of whether you’re studying or have graduated. The rate for a given year is either the RPI (the measurement of inflation) from March of that year or the Bank of England base rate plus 1%, whichever is lower. So, for 2022-2023, the latter is lower, giving you an interest rate of 3.25%.

Plan 2 loans refers to loans that were taken out after August 2012 in England and Wales. These loans have an interest rate of RPI plus 3% while you’re studying until the April after you graduate, and RPI plus anywhere from 0-3% based on your income after that. However, due to inflation, 2022-2023 interest rates would have been 12%, so all loans have now been capped at 6.3%.

Scottish students who started a degree in the UK after September 1998 pay Plan 4 loans. Plan 4 loans pay the same amount of interest as Plan 1 loans.

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How much will you pay?

While these numbers might cause you some worry, they may not affect the amount you’ll be paying back as much as you might think. Even if you’re paying back £10,000 more due to inflation, the value of your degree is still the same. For example, a car bought with that tuition money would be worth £10,000 more, too.

Crucially, the interest rates don’t impact your yearly payments. The amount you pay is based on your salary, not the total amount you owe. So even when interest rates go up, your payments don’t. What the interest rates affect is how long you’ll be paying back the loan. The maximum amount of time you could pay your loan back for is 30 years, and then the debt is disregarded after that. So, for many people the total amount owed is irrelevant. It’s only what you’ll be paying in those 30 years.

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Zoe Kramer has been writing for GRV Media’s student-centric website Freshered since October 2022 and is now also contributing to HITC. She graduated from Cardiff University in 2022 with a BA in Journalism, Media and English Literature. During her time in university, she worked for her student newspaper as well as completing an internship with a book publisher. She has also written and continues to write book and theatre reviews. She is excited to now be pursuing a career as a journalist and learning something new every day. In particular, she loves writing about student life, books, the Internet, and travel. Originally from the United States, she is enjoying living abroad in the UK.