Student debt – still expensive, but cheaper than it was
The rate of interest payable on student debt will fall in September, down from the current rate of 5.4% to 4.5%.
A bit of a reduction, but still expensive compared to many other forms of debt.
The interest rate for student loans for the academic year is 3% higher than the increase in the Retail Price Index (RPI) for the year to the previous April. The RPI increased by 1.5% in the year to April 2020.
This new interest rate means that the interest added to a typical £40,000 student loan will be £1,800 for the year starting in September 2020.
A graduate earning £46,975 with an outstanding loan of £40,000 will have £1,800 deducted from their pay in 2020/21, which will simply pay the interest on the loan.
A graduate earning less than this, with the same loan balance, will see the balance increase, while those earning more will pay more but reduce the balance.
Interest rates have reduced in recent years, but student borrowing is far from cheap, and the interest payable on student loans remains high compared to other forms of finance.
It seems particularly unfair to continue to link the interest rate to RPI, when the government uses CPI (which is usually lower) for benefits and to calculate interest rates for National Savings Certificates.
The high rate of interest seems unreasonable in the current climate when the government is paying next to no interest on its debt, and the Bank of England Base Rate is just 0.1%.