Rise in Inflation to Affect Student Loan Rates

The unexpected rise in Retail Price Index (RPI) could leave as many as four million graduates and students facing a rise in interest rates. Student loans are related directly to the RPI measure of inflation for each year. According to the latest figures, the RPI went up by 4.4% in March this year implying that student loans are set to surge.

Needless to say that this would come as a shock to the students given that they are currently paying negative or no interest because the RPI had fallen to a 50-year low of -0.4% last March. The rise means that the student loans would continue to grow even when they begin to make repayment and that the interest would be higher than their repayments.

For over 400,000 graduates who are repaying loans that they took before 1998, the interest rate is entirely based on the RPI. The rise in RPI means that they would need to start repaying 4.4% on their outstanding loans. For the remaining 3.3 million people who have taken out student loans since 1998, the interest rate is either based on the RPI or the Bank of England base rate plus 1%, depending on which is lower.

The base rate has been 0.5% for the past 13 months, and in case it stays the same, students will now have to pay a new rate of 1.5% interest from September. Students currently at university or college can take out loans up to a maximum of £10,153 a year, implying some will be graduating with debts of more than £30,000. For many students this could mean that their debt would continue to rise even when they start earning.

All this may spell bad news for the students but it is important they understand that they should seek debt advice at the earliest to avoid a bad debt situation right at the onset of their careers. A careful financial planning on their part can ensure that the situation does not go out of control. There are many debt management companies in the UK providing free, impartial and non-judgmental debt solutions (IVA and Debt Management Plans) on managing finances and loans. It is in the best interest of the students to approach the financial experts and talk to them in confidence about their debts and seek their opinion in dealing with them.