Student loan interest rates capped

The government will cap student loan interest rates for current graduate borrowers to protect them from a rise in inflation.

A rise in the rate of RPI due to global economic pressures meant student loan borrowers faced a 12% interest rate in September and the government has intervened and capped interest rates to a maximum of 7.3% to protect graduates.

The government will take every opportunity to protect the public from the rising cost of living and global economic pressures. Confirmation on interest rates is usually made in August, but the government has taken unprecedented steps to bring the decision forward, based on predicted rates, to provide reassurance for student loan borrowers on Plan 2 (undergraduate) and Plan 3 (Postgraduate) loans.

This is the largest scale reduction of student loan interest rates on record and will mean, for example, a borrower with a student loan balance of £45,000 would reduce their accumulating interest by around £180 per month compared to 12% interest rates. This is on the total value of the loan, as monthly repayments do not change.  

Higher and Further Education Minister Michelle Donelan 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%.

“I want to provide reassurance that this does not change the monthly repayment amount for borrowers, and we have brought forward this announcement to provide greater clarity and peace of mind for graduates at this time.

“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.”

Monthly student loan repayments are calculated by income rather than interest rates or the amount borrowed. Unlike for commercials loans, repayments will stop for any borrowers who earn below the relevant repayment threshold. 

For future borrowers, student finance will be put on a more sustainable footing. As announced in February, interest rates will be reduced so from 2023/24, new graduates will not, in real terms, repay more than they borrow. Alongside wider reforms to higher education, this will help to make sure that students from all walks of life can continue to receive the highest-quality education from our world-leading higher education sector.

This comes alongside a package of support worth £37 billion to help people with rising cost of living, including £400 for all households off their energy bills, targeted support for vulnerable households for costs including food and energy, and changes to Universal Credit, National Living Wage and National Insurance thresholds, so that people keep more of what they earn.

NOTES TO EDITORS

• From 1 September 2022 until 31 August 2023, the interest rate applied to Plan 2 Income Contingent Repayment (ICR) student loans and the interest rate applied to Postgraduate loans will be capped in line with the forecast prevailing market rate for comparable unsecured personal loans.
• Subject to continued monitoring of the prevailing market rate, from 1 September 2023, the Plan 2 income contingent repayment student loan interest rate is expected to revert to variable rates of standard rate to standard rate +3% and the Postgraduate loan interest rate is expected to revert to RPI +3%. 
• The Government regularly monitors the interest rates set on student loans against the interest rates prevailing on the market for comparable loans. Following a large rise in RPI, the Government will temporarily reduce the Plan 2 and the Postgraduate loan interest rate in line with the forecast prevailing market rate.
• The Plan 2 ICR student loan interest rate and the Postgraduate loan interest rate will be 7.3% between 1 September 2022 until 31 August 2023.
• The PMR is not defined in law. No product on the market offers a direct “market rate” comparison to student loans. We have previously confirmed that the most appropriate comparators for undergraduate student loans are the effective interest rates available on unsecured personal loans, as published by the Bank of England. We consider effective interest rates to be a better comparator than the advertised interest rate because an effective interest rate must be available to more than half of applicants. The typical student tends to have little or no credit history or income and so is likely to be riskier to lend to, meaning that most students are unlikely to be offered a loan at the advertised rate.
• The Department considers that a 12-month rolling average is an appropriate indicator of whether a rate is “prevailing” on the market. This means that short-term shocks in the system, such as lender sales, do not cause significant changes to the PMR.
• We monitor the PMR on a monthly basis. If the PMR is below the student loan interest rate for a minimum of three consecutive months, the PMR cap will be triggered for a corresponding period of time.