Graduates could be weighed down by 12 per cent interest payments on student loans from September, fresh analysis has revealed.
The Retail Price Index soared to nine per cent in March meaning students could face a “rollercoaster” of interest rates over the months ahead, according to the IFS.
High earning students who took out loans from 2012 will be slapped with an interest rate three per cent higher than RPI until a price cap kicks in next March.
“This interest rate rollercoaster will cause problems,” said Ben Waltmann. “Sky-high interest rates may put some prospective students off going to university and some graduates will likely feel compelled to pay off their loans even when this has no benefit for them.”
While the Department of Education says interest charged on student loans cannot be higher than rates “prevailing on the market” for commercial loans, there is a six month lag between interest rates exceeding the cap and the rate being reduced.
Graduates paying the maximum 12 per cent interest rate with a typical loan balance of £50,000 will incur around £3,000 of interest over a six month period – a figure likely to vastly outstrip repayments. Lower earning graduates will be shielded from the highest interest rate, but will still see a hike from the current level of 1.5 per cent to nine per cent.
The rate will fall back to seven per cent for the highest earners when the price cap kicks in next March. It is then likely to fluctuate between seven and nine per cent for a year and a half until falling to zero per cent in September 2024, the IFS said.
“The IFS report makes it clear that changes in interest rates have a limited long-term impact on repayments, and the Office for Budget Responsibility predict that RPI will be below 3 per cent in 2024,” said a Department for Education spokesperson.
“Regardless, the Government has cut interest rates for new borrowers so from 2023/24, graduates will never have to pay back more than they borrowed in real terms,” the spokesperson added.
The government is planning sweeping student loan reforms for students who start at university from September 2023.
Students will repay their loans over 40 years instead of 30 – a change meaning high earning graduates pay less overall as they pay off their loan more quickly, but likely to adversely affect middle-income individuals.
For those in the new system interest rates will be capped at the level of RPI inflation. The Student Loans Company declined to comment.