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Student loan interest rate set to rise

With all the chaos surrounding GCSE and A level results, it’s easy to overlook another student related story that’s been in the news.

From next month, students in England and Wales will face higher interest rates on their student loans with the maximum interest rising from 5.4% to 5.6%.

The increase will apply to anyone who started an undergraduate course in the UK after September 2012, including those studying or starting university this year or who has graduated or left a course in the past few years.

Three Counties Payroll has rounded up some key facts about the increase.

Why are rates going up?
Plan 2 interest is based on the Retail Prices Index (RPI), which measures the cost of living. Whatever RPI is in March becomes the loan’s interest rate, plus up to 3% on top. This year’s RPI is 2.6%, up from 2.4% the previous March.

What does this mean for the loan balance?
The balance will accumulate a bit more interest but the rate will be on a sliding scale depending if people are still studying or have left their course. Either way, the rate rise won’t make a massive difference to the balance.

Will students be worse off?
Students won’t be out of pocket because of higher rates as they don’t start repayments until they’ve left and are earning above an income threshold. They will then repay 9% of anything they earn above the threshold of £26,575 (£27,295 from April 2021). If they earn less than this, repayments stop until they’re back over the line. Interest rates have no impact on monthly repayments.

Should the loan be repaid early?
Students shouldn’t feel pressured into making early or additional payments. Paying the loan back early could save higher earners money in the long run but most students will never earn enough to repay the full sum. After 30 years, any remaining balance is wiped out.

Last, but not least, the interest rate has no bearing on how much the loan costs and remember that the RPI can fall. Student loan interest in 2018-19 was 6.3%, so it can and does go both ways.

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