Student loan interest rates cut again due to market rates

Student loan borrowers will be further protected from rising inflation rates with additional cuts to interest rates for those on Plan 2 and Plan 3 loans.

Student loan interest rates will now be capped at 6.3% from September 2022. The Government intervened in June to protect borrowers in response to the rise in the rate of RPI due to global economic pressures which meant student loan borrowers faced a 12% interest rate in September.

To provide reassurance for student loan borrowers on Plan 2 (undergraduate) and Plan 3 (Postgraduate) loans, the Government used predicted market rates to bring forward a cap on interest rates to a maximum of 7.3%. The actual market rate is now 6.3%, so the cap has been reduced to this figure.

By setting an interest rate of 6.3% rather than the expected 12% this will bring down the student loan interest rates by the largest amount on record and will mean, for example, a borrower with a student loan balance of £45,000 would reduce their accumulating interest by around £210 per month compared to 12% interest rates. This is on the total value of the loan, as monthly repayments do not change.  

The government is taking every opportunity to protect the public from the rising cost of living and global economic pressures.

Minister for Skills, Further and Higher Andrea Jenkyns said:

“We understand that many people are worried about the impact of rising prices and we want to reassure people that we are we are stepping up to provide support where we can.  

“Back in June, we used predicted market rates to bring forward the announcement of a cap on student loan interest rates down from an expected 12% and we are now reducing the interest rate on student loans further to 6.3%, the rate applying today, to align with the most recent data on market rates.

“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. 

A spokesperson for the Student Loans Company said:

“The change in interest rates is automatically applied so customers don’t need to take any action. We encourage customers to use SLC’s online repayment service to regularly check their loan balance and repayment information, as well as ensure their contact information is up-to-date.”

For new students from August 2023, student finance will be put on a more sustainable footing. Student loan interest rates will be reduced so that they will not, in real terms, repay more than they borrow.

In response to the rising inflation, the government is providing support for households to help those struggling to make their incomes stretch to cover the basics. This government is providing eight million of the most vulnerable households with £1,200 extra support this year, with all domestic electricity customers receiving at least £400.  Last week it was announced that National insurance contribution threshold will be raised, giving the typical worker a tax cut of £330 per year and from next week (from 14 July), millions of low-income households will start to receive the first instalment of their Cost of Living Payment.

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 6.3% between 1 September 2022 until 30 November 2022.
• 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.

• From August 2023 we’re introducing a new loan plan that will reduce the interest rates charged on student loans to RPI-only for new borrowers. The new loan plan will require borrowers to make repayments if they are earning £25,000 per year or more (increasing with inflation from April 2027) and will require borrowers to continue repaying their loans for up to 40 years.
• Ministers have chosen to set an interest rate of 6.3% rather than the expected 12%, bringing the student loan interest rates below RPI by the largest amount on record. Student loan interest rates will be reviewed again in December, to ensure that they remain aligned with market rates.