Student loan interest rates will be capped at 7.3 per cent for a year as inflation soars, the government has announced.
Borrowers had feared facing a 12 per cent interest rate in September due to a rise in Retail Price Index (RPI) inflation. However, the government has decided to intervene ahead of the point that interest rates on student loans are usually confirmed for the coming year, in August, to “provide greater clarity and peace of mind for graduates at this time”.
The interest rates cap, which affects those on Plan 2 (undergraduate) and Plan 3 (postgraduate) loans, will come into effect from September 2022. The Department for Education described the move as “the largest scale reduction of student loan interest rates on record”.
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Michelle Donelan, the higher and further education minister, said: “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, which is why we have reduced the interest rate on student loans down from an expected 12 per cent."
She added: “For those starting higher education in September 2023 and any students considering that next step at the moment, we have cut future interest rates so that no new graduate will ever again have to pay back more than they have borrowed in real terms.”
What does the cap mean for repayments?
The cap will not affect monthly repayments, which are based on income. What it does mean is that people who have taken out loans will owe less in the long term than they would have done if interest rates had not been capped below 12 per cent.
The DfE said it will mean, for example, someone with a balance of £45,000 would reduce their accumulating interest on the total value of the loan by around £180 per month, compared to 12 per cent interest rates.
In February, it was announced that graduates would start paying their loan back over a salary threshold of £25,000 from September 2023. Loan balances are also set to be written off 40 years after repayments start, whereas currently graduates pay back over 30 years.
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