Are student loans getting cheaper?

With sky-rocketing inflation and energy bills so high in the UK you’d think they were a cruel joke, it’s getting tough out here. Yep, the cost of living crisis is pretty hard to ignore but the resistance has already begun, with unionised strikes across the Royal Mail and railway network and activists organising an energy strike by refusing to pay bills from 1 October.

Another welcome respite came on 10 August, with the news that the government would be cutting the inflation rate on student loans to 6.3%, after previously setting the cap at 7.3%. This, in theory, would lead to lower accumulated interest on your student loan (aka less to pay back, overall) but what does it all mean?

First thing's first: what do the proposed changes all really mean? For those who aren’t super well-versed in financial matters, “interest” is the additional amount you are charged when you borrow money — normally an annual percentage of the sum you have borrowed, which is added onto what you have to pay back. Student loan interest rates in the UK, are normally calculated according to general inflation rates in the UK plus an additional 3%. However, with inflation rates currently high in the UK, the government has intervened to reduce the interest on tuition loans.

Jake Butler, Save The Student’s Operation Director, explains: “The student loan interest rate for all students and graduates that started in or after 2012 are set to be 6.3% from September. This is regardless of how much you are earning."

"The student loan interest rate usually changes each September and is based on March's RPI figure (a measure of inflation). While you're at uni the interest rate is normally RPI + 3% and when you graduate is is on a scale of RPI + up to 3% based on how much you are earning,” he says.

“As RPI in March was a whopping 9%, it meant that the interest rate for some could have been as high as 12% which would have totally eclipsed anything we'd seen before as treble the current interest cap.”

Sounds like good news, right? Well, maybe don't get your hopes up.

James Yelland, the Communications and Marketing Manager at the Money Charity, argues that the changes this will bring about are actually minimal for many people. “We wouldn't say there is much of a significant story here as the change is pretty small. All this changes is the total amount a student will owe and potentially repay, it makes no difference at all to their monthly repayments and therefore their day-to-day money.”

Butler agrees, explaining that the changes to interest rates may not have a tangible impact on individuals’ financial wellbeing. “Monthly repayments will still be 9% of anything a graduate earns over £27,295, and it's still the case that the mid to low earners will not wipe their debt before the 30 year cut off,” he explains. “Interest for those earners could be 5000% and this would still not make a difference to them. So cutting it to 6.3% come across as a political move.”

In fact, Butler argues that this change to interest rates could be something of a media stunt, intended to avoid further discouraging students from pursuing higher education due to mounting costs. “The government were likely concerned about the psychological impact that might have on prospective students, current students and graduates and therefore took the decision to cap it at 7.3% initially and now 6.3%,” he explains. “If the change is in response to the cost of living crisis then this move is purely a psychological and political one.”

Okay, but surely someone has to benefit? Right? Well, sadly, not — unless you’re planning on getting a job as a neurosurgeon or currently reaping the benefits of a finance degree. In short, it’s only high earners who may really be seeing any positives. “The only graduates that will potentially benefit from this interest rate decrease is high earners,” says Butler. “They are the ones that are likely to pay off their whole loan before the 30 year cut off and therefore can benefit from lower interest.”

Not to be cynical, but the announcement may actually be a smoke screen to distract from much more concerning changes to student loan repayments. “The bigger concerning issues are the proposed extension of student loan wipeouts from 30 years to 40 years, plus the forthcoming lowering of the repayment threshold from just over £27,000 to £25,000,” explains Yelland.

To dig a bit more into what Yelland has said, back in February the Department for Education announced that the allotted time period for students in England to pay back their student loans will be extended from 30 years to 40. Up until now, individuals who don’t manage to pay their loans back within three decades of graduation get a clean slate after this period — but now the government wants us to keep paying for an extra decade, which may well potentially harm future generations as they look forward to planning and saving for retirement.

At the same time, the government confirmed it would be going ahead with previously announced plans that the repayment threshold (ie when anyone with student loans starts paying a proportion of their monthly salary back to the government) will be cut from £27,295 to £25,000 for 2023 graduates. This means that lower income graduates will be hit by loan repayments, as well as the squeeze of the cost of living crisis.

It all sounds pretty grim, there’s no denying it. But what changes do we need to start pushing for to make the difference we all want to see? Well, we need student loan interest rates to actually sit below inflation, for a start. “The government would need to make a commitment of lowering the interest rates to just inflation for it to make any potential difference to the overall repayments of most students,” says Butler.

For students still in further education, it could be a case of pushing to make more funding available by upping maintenance loans — particularly for students from lower income backgrounds. “In my opinion, the government is still ignoring the significant issue here, which is the lack of adequate funding via the maintenance loan to help with living costs,” explains Butler. “With the rate of inflation the way it is at the moment this should be the key focus otherwise I fear we're sleepwalking into a huge financial crisis for students this winter.”

Knowledge is power: now you know what needs changed, you know what to push for. See you in the fight!

For students concerned about the cost of living crisis and looking for practical help, Save The Student has an extensive bank of resources on student financial wellness, including deals and discounts, jobs listings and information on banking and budgeting.