Student Loan Interest Rate Cap Reaches 6.3%

The interest rate on student loans across England and Wales is soon to be capped at 6.3% this coming autumn.

It has previously been due to rise from the current 4.% up to 7.3%, however it is now being altered so that it can “align with the most recent data on market rates” for loans. The cap will be reviewed again in December.

England’s Universities Minister, Andrea Jenkyns, told the BBC that the change reflects her wish to “provide support” amid the rising cost of living.

However, this cap has been met with criticism, especially from the Institute for Fiscal Studies who said that the autumn change would do “nothing at all to protect current students”.

At present, the interest rate for those in university attendance in either England or Wales is calculated by adding on 3% to the retail price index – a measure of inflation that indicates the rate at which prices are rising.

The RPI figure was confirmed in April, and thus set the interest rate for the upcoming academic year. This came at a time where the Institute for Fiscal Studies released their predictions that the maximum interest rate charged on top of student loans would jump up from 4.5% to 12% from September this year.

However, in June the UK Government then announced an interest rate cap for students at 7.3% to give graduates a “piece of mind”.

The fall in the cap now down to 6.3% is intended to offer further recurrence to current and future university students anxious about repaying their student loans.

Jenkyn’s told the BBC that she understands that “many people are worried about the impact of rising prices and we want to reassure people that we are stepping up to provide support where we can.”

The Welsh Government has announced that it would follow suit too.

“It is important to note that the student loan interest rate cap announcement made by the UK Government will not change the amount that borrowers will repay each month,” explains Richard Allan, of finance platform, Capital Bean, reflecting on how student loans are treated in America.

“Instead, it will change the overall total amount that they owe. As such, most graduates’ current repayments will not be affected by the latest announcement.”

David Soffer of price comparison, ProperFinance.co.uk, commented:

“The use of price caps has been very successful in regulating other types of loans and industries and for students, this reform is essential to avoid the mountain of debt that they often face after graduation, and sometimes take 10 years or more to pay off.”

“With rising living costs and high inflation, adding heavy student debt on top is not good for society.”

Senior Research Economist at the IFS, Ben Waltmann, told the BBC that only the “minority of, mostly high-earning, graduates set to pay off their loans in full will ever actually benefit from this,” he said – adding that it would reduce a typical student loan balance by about £100 this autumn for recent graduates.

“Importantly, this does nothing at all to protect current students from the rising cost of living.”

The latest analysis released by the IFS suggests that this coming academic year will see the real-terms value of student maintenance loans for students coming from the poorest backgrounds fall to its lowest level in seven years – meaning these students will be out of approximately £100 each month.