DIY Investor Magazine
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June 2017
56
SCHOOL OF HARD KNOCKS
A savage financial blow as interest on
student loans hits 6.1%
Last year Muckler highlighted the double whammy
of increasing tuition fees and interest rates applied
at levels way above the Bank of England base rate -
; he now revisits the subject as rates
soar to 6.1%.
However unpopular it made Nick Clegg in 2010 when
university tuition fees trebled to £9,000, many students
remained sanguine about the fee and loan regime
because they only have to pay back when they reached
a certain earnings threshold; loans would be written
off if they never earned at that level and many may
have dismissed the interest charged on the loans as
unimportant.
However, the hike in interest to be applied in September
could add years, and tens of thousands of pounds, to
repayments.
HOW STUDENT LOANS WORK
‘Plan Two’ is the regime that applies to students starting
university since September 2012; interest on loans starts
at the level of the Retail Price Index (RPI) and increases
to RPI + 3%.
RPI is one of the two main measures of UK consumer
inflation produced by the Office for National Statistics,
and is typically 0.9% higher than CPI; the rate of RPI in
March of each year sets the student loan interest rate
from the following September.
A graduate earning under £21,000 pays interest at a
rate equivalent to RPI, whilst those earning £41,000 or
more pay RPI + 3%, with a sliding scale in between.
When the current system was introduced, RPI was 0.9%,
meaning borrowers paid a maximum of 3.9% interest;
however, inflation is now feeding through and RPI hit
3.1% in March, meaning that the top rate of interest is
now a 24 x multiple of BoE base rate at 6.1%. Students
also pay the maximum RPI + 3% while they are studying
and until the April after they leave the course; Muckler
can see no justification in undergraduates with little or
no income being charged the same rate as graduates
earning more than £41,000.
The average graduate finishing a three-year course
this summer will owe £48,633 which includes £4,980 in
interest accrued during their studies; those who take a
four-year course will owe £66,659, including £8,455 of
interest.
The hike in rates adds more than £3,000 to the average
balance in a year; with repayments made at 9% of the
amount earned over £21,000 a salary of £51,500 would
be required just to pay back more than the interest
accruing on a loan.
A generation is starting adult life ‘on the back foot’
with the Bank of Mum and Dad pressed into action as
parents have re-mortgaged their homes or cashed in
pension pots to help their children avoid student loans.
For those on modest incomes, making the minimum
repayments, their debts will only get bigger and bigger
and many may never be able to pay them off at all.
DEBTS WIPED OUT AFTER 30 YEARS.
Loans outstanding after 30 years are currently written
off leaving taxpayers to pick up the bill, although if that
were reneged upon, graduates could carry this debt
‘MUCKLER CAN SEE NO JUSTIFICATION IN
UNDERGRADUATES WITH LITTLE OR NO INCOME
BEING CHARGED THE SAME RATE AS GRADUATES
EARNING MORE THAN £41,000’
