The interest rate on student loans in England and Wales is increasing from 4.5% to a maximum of 7.3% from September. Although a significant rise, it is a reduction on the anticipated rise, which would have been 12% based on the inflation rate.
This means a potential saving of £180 per month on the accumulated interest for a student loan balance of £45,000, according to the Department of Education. However, monthly repayments will remain unchanged, with students instead paying less overall over the lifetime of the loan.
The government announcement on the change to the interest rate on student loans follows the publication earlier in the year on an overhaul to the way higher education is funded, which is set to be introduced for those starting in September 2023.
How is the student loan rate calculated?
The student loan interest rate is generally announced in August for the next academic year and is based on the Retail Price Index from the previous March. The total amount you pay depends on whether you are still studying or, after the April following graduation, how much you are earning.
|Annual income||Student loan interest rate|
|Over £49,130||RPI +3%|
|Between £27,295 - £49,130||RPI and a gradual increase from RPI to RPI +3%|
Based on the RPI figure from March 2022, which was 9%, the student loan should have been capped at 12%. However, the Department for Education has opted to cap it at 7.3% and announce it earlier than usual "to provide greater clarity and peace of mind for graduates at this time".
How much will you have to repay?
As the repayment on your student loan is based on your income, your monthly payment won't change as a result of the new price cap. However, the total value of the loan will reduce, which means you are likely to pay off less over the lifetime of the loan. It's worth noting that, as the debt is currently cancelled after 30 years, if you are on a lower income you are unlikely to benefit fully from the reduction in the rate.
As it stands, students have to repay their loan at a rate of 9% on anything they earn over £27,295 per year. If, for example, you earn £35,000, you will repay £693.45 per year. This is calculated on the fact you only pay on the portion of your income above the threshold: 9% of £7,705, which is £693.45.
For students starting higher education in September 2023, the system is changing. The repayment term will be 40 years instead of 30 years, after which point the debt will be written off. In addition, the income threshold is being reduced to £25,000 until the academic year 2025/26, but the interest payable will track RPI, meaning students will not pay back more than they borrowed in real terms.
For more information on student finance, read our article "Student debt: What you need to know about repaying your student loans".