The Brexit vote would’ve caused the interest rates in loans to fall through the floor, but sadly, for graduates and students, there’s one exemption. Interest rates on student loans are set to soar by a third, due to an ill-timed surge in inflation.
This, in combination with the withdrawal of maintenance grants, and political U-turn on the repayment terms and conditions, has created one of the toughest financial situations for students yet.
No wonder the ‘Generation Regret’, a report by an insurance company, found that a third of graduates wished that they hadn’t studied for a degree, whilst half of them believe that they could’ve have got their current job without it.
Nevertheless, good news is that only some graduates will be forced to pay the entire amount. Many of them will easily get away without paying a single penny.
Before you take out a loan or if you have already taken one, you need to check for hidden policies. This policy is none other than PPI (Payment Protection Insurance). All of us know that the policy was sold alongside credit cards, loans, and mortgages, without the consumer’s consent.
So, if you feel that you’ve been mis-sold one then it’d be better to make a claim, since you may have a chance to get a refund on it.
As students wonder how much their degree could really cost them, here we take a look at why loan rates have changed and who is being affected.
Why has the rate gone up?
Under the student loan policy that was introduced in 2012, the rate of interest was pegged to the retail price index (RPI), which is measured once every year, in the month of March.
For individuals who are still studying, the interest rate on the remaining balance rolls up at a substantial rate of RPI plus 3 percentage points, but they don’t need to pay it off during this period of time.
When they reach the first April after their graduation, the loans start accumulating RPI inflation for graduates who are earning less than £21,000. Past students only need to repay the loan along with the interest, only when they start earning more than £21,000.
At this point, they need to pay off 9% of their earnings, above the threshold including a sliding scale of interest rate.
In 2016, the RPI rate of inflation rose to1.6%, so this is the present rate of interest paid by graduates who are earning £21,000, increasing to a maximum of RPI plus 3%, for those who are earning at least £41,000, a sum total of 4.6%.
But from September 2017, it will rise to 6.1%, made up of the March 2017 figure 3.1% plus 3%.
How does this compare with the previous years?
In 2015, graduates had a reprieve when the March RPI figure came in at 0.9%, but in 2016, the RPI figure rose to 1.6%.
As a rough guide, graduates with £40,000 in student debt, which is common for those staying in expensive cities, were expected to pay an extra of £280 in interest, increasing to £310 if they owed £45,000.
This would further increase for those who have graduated now (2017), as they’ll be expected to pay interest between 3.1% and 6.1%, on the basis of their income.
For how long will this go on?
Typically, the rate remains until the RPI is measured again in the month of March. The RPI rate measured in 2016 was 1.6%, but this year it rose to 3.1%, which will come into effect from September.
Experts say that, as inflation is expected to rise because of Brexit, students ought to be prepared for a spike in their loan interest rates.
Five years ago, inflation was as high as 5.6%; but in reality, most of the economic projections had put the figure between 1.7% and 2% for this year, but it was measured to be more than that, i.e. 3.1%.
Who does the rise in rates apply to?
In theory, the rate rise is applied to those who started with their university course on or after September 2012. Nevertheless, only the graduates earning just above £21,000 will be affected.
Any rise in RPI would inflate the total amount of debt students might have to pay off in the long run, but any graduate would feel this, especially when they’re asked to start repaying their loan.
Students who are attending universities in Wales and England have also been hit by higher tuition fees, increasing to £9,000. From 2017, colleges and universities meeting some of the educational standards have been permitted to raise their charges in line with inflation. Put simply, they can now charge up to £9,250.
However, students attending a Scottish university are exempted from tuition fees, yet they typically attend university for four years, instead of three, and are required to contend with a scarcity of grants as well as high living expenses.
What other changes have been made?
Maintenance grants that helped poorer students meet the expenses of university education, were replaced last year with maintenance loans.
Now, only students who are disabled or require assistance with childcare expenses are eligible for grants.
In 2015, the amount to be paid back by graduates was raised by scrapping the commitment to increase the earnings threshold for repaying the loan annually.
The threshold was set to £21,000, and has now been frozen until 2021. One of the financial campaigners had increased the probability of fighting the changes with a case in the court, though he said that the entire prospect of a lawful challenge sadly does not look good.
Should you pay off your student loan?
Students can make additional payments towards their student debt, but this could turn out to be a bad move. They have to start repaying their debt only once they start to earn more than the set threshold of £21,000.
A recent research has shown that more than two thirds of graduates leaving the university, won’t earn enough to pay off the entire amount. Also, after 30 years, any outstanding amount is written off.
Yet, some of them would be able to pay off the complete debt within 30 years, only if they received a salary of about £40,000, and their income rose by 2% above inflation, every year, with no career breaks taken in between.
Experts say that graduates must think of their student debt more often, like a means tested tax.
For example, with a student debt surpassing £50,000, well before the interest starts rolling up, it is likely that a considerable proportion of students will not pay off their loan in full.
Also, if students think of working for a low paying job, or simply take off time to raise a family, then it might be possible that they’ll never repay the entire upfront cost of their degree.
