Interest Rate Doubles Overnight!

It's bad news for millions of students and graduates as the interest rate on student loans doubled on 1 September, costing an extra £500 million.

If you're a young person looking forward to starting university this month, an existing undergraduate, graduate or former student, then I'm afraid that I have some bad news for you. Millions of people with student loans -- debts owed to the Student Loans Company (SLC) -- are in for a shock, because on 1 September the SLC doubled its interest rate.

On 1 September each year, the SLC reveals the fixed interest rate that it will charge for the next twelve months. The SLC's interest rate is linked to a measure of inflation (rising prices) known as the Retail Prices Index (RPI). The bad news for SLC borrowers is that the RPI hit a sixteen-year high in March 2007, when this year's interest rate was calculated. Thus, the interest rate paid on student loans will double in September, from 2.4% to 4.8%.

The SLC charges interest from the moment that it pays out loans to students until they are paid off in full. However, borrowers don't start repaying their loans until the April after graduating (or dropping out) and only if their annual before-tax salary is over £15,000. Once ex-students' earnings exceed this level, repayments of 9% of their earnings are collected directly from their pay packets by employers, which then pass on these sums to the SLC.

Almost 900,000 SLC loans will be taken out this academic year, so this rate increase is awful news for British students. In total, past and present students owe an enormous amount to the Student Loans Company: almost £19 billion in 2005/06, with this figure growing by around £3 billion a year. So, a rate hike of 2.4% will cost students around £500 million more in the coming academic year. Ouch!

So, thanks to a statistical fluke, the interest on student debts will double for twelve months, which could mean that student debts will increase by hundreds of pounds over the coming year. One of my friends, for example, a 22-year-old third-year undergraduate reading law, currently has £16,000 of SLC debt. Under the 2006/07 interest rate of 2.4%, her debt would have grown by £384 over the past year. However, as the SLC interest rate has doubled, so too will her interest bill, which leaps to £768.

The good news is that the SLC's interest rate is unlikely to stay this high in 2008/09, as the RPI figure has been falling steadily since peaking in March. Indeed, the SLC has reassured students that it expects student loans to become cheaper from September 2008. Nevertheless, for one year, student loans will become considerably more expensive. Here's how the SLC's interest rate has varied since student loans were introduced in the 1990/91 academic year:

Historic student loan interest rates

As you can see, the interest rate for 2007/08 is the highest charged by the SLC since the early days of the SLC in 1991/92.

Finally, as an undergraduate, I went on a huge march through London in 1989 to protest against the introduction of student loans. Thanks to the Internet, student protests are now far more sophisticated, so perhaps some enterprising student will react to this news by starting a "Say No to More Expensive Student Loans!" campaign on social-networking website Facebook? It worked when HSBC tried to withdraw interest-free overdrafts for graduates (see Students Fight HSBC And Win!), so it's worth a try. Good luck!

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