For students in England, the maximum interest rate on student loans will be capped at 7.3% after a cut of almost 5%, according to the government.
This comes after the Institute for Fiscal Studies (IFS) predicted that the interest rate would shoot up to 12% by autumn 2022. Michelle Donelan, minister for higher education, said that this new cap aims to give ‘peace of mind for graduates’ in the face of the rising cost of living.
A fair deal for students?
Currently, interest rates for current students in England is calculated by using the retail price index (RPI) measure of inflation, with an additional 3% on top of this.
In April 2022, the RPI figure confirmed the interest rate for the 2022/23 academic year, with the IFS stating that the maximum interest rate was set to leap from 4.5% to 12% from September 2022 onwards.
Student interest rates are normally confirmed in August, but Donelan said that this earlier announcement hoped to ‘provide greater clarity and peace of mind for graduates at this time.’
Donelan added; ‘The government has always been clear that where it can help with rising prices we will, and I will always strive for a fair deal for students.’
‘Cruelly high’
However, both the IFS and the National Union of Students (NUS) have pointed out that this cap will have little tangible fiscal impact for individual graduates – the IFS said this development would ‘have little or no effect’ on repayments, and the NUS said that the 7.3% cap remained ‘cruelly high.’
The president of the NUS, Larissa Kennedy, stated: ‘These interest rate figures are still cruelly high.
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‘While some graduates might breathe a sigh of relief that the interest rate is no longer in double figures, ministers should be prioritising providing urgent cost-of-living support here and now,’ Kennedy said.
She also pointed out that the UK government ‘should introduce rent protections, offer basic levels of maintenance support and announce a cost-of-living payment for all students.’
‘Little or no effect’
IFS senior research economist Ben Waltmann recognised the government’s announcement as ‘great’, but noted that ‘for most graduates, this announcement will have little or no effect on their repayments.’
This is due to the fact that most graduates paying back their undergraduate loans will ‘likely never pay off their loans in full, so the interest rate never affects their repayments,’ Waltmann said.
He added; ‘Even for the typically high-earning graduates who do pay off their loans, very high-interest rates from September to February would have been counterbalanced by very low-interest rates further down the line, which now won’t come to pass either.’