Hundreds of thousands of students will be taking out loans this year to pay for their forthcoming years in further education, and they will be doing so at an interest double that of 12 months ago.
Jointly owned by the Department for Education and Skills and the Scottish Office, the Student Loans Company has doubled its interest rate on student loans from 2.4% to 4.8%. The rate used is linked to the retail price index (RPI) as its stands in March of each year. In March 2006 it was 2.4%, and in March this year RPI was 4.8%. In July of this year RPI stood at 3.8%.
The rate has not been at this level since 1991. A Student Loans Company spokesman said that the rate was unusually high, and they expected the rate to come down next year.
Unfortunately, students taking a loan out now are lumbered with the 4.8% rate for at least a year as it is fixed for that long. Loans start accumulating interest immediately and continue to do so until they are finally repaid. Although the rate is fixed for a year, unlike a commercial loan from a bank it is variable, and will change when set again each year.
Student loans begin to be repaid from the April after graduation, once graduates are earning at least £15,000 a year. Repayments are calculated as 9% of their income. A typical graduate leaves university with an outstanding student loan of around £12,000 so, at the current rate of 2.4%, £288 would be added if no repayments were made. However with the rate at 4.8%, this would result in £576 being added in interest – double the current amount.
The number of students taking out loans has more than doubled in the past dozen years. The figure stands at 880,700 compared to 430,400 12 years ago.
British students have built up a £27bn debt in the last ten years, and many have had to consider bankruptcy as their ultimate solution.
In 2008 the government is to introduce five-year repayment freezes for graduates and the percentages of students receive non-repayable grants will also increase.
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