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Interest rates on student loans are set to rise to as high as 12%, this could cost high-earning graduates an extra £3000 every 6 months unless the government intervenes. Following the RPI rise in March, most recent grads will be charged 9% interest which is substantially up from the current 1.5%.
The Institute for Fiscal Studies analysis found that higher-earning graduates would be most affected by the increase, as they were more likely to repay their loan within 30 years of graduation. It is also worth noting that highly paid graduates earning over £49,130 a year are charged an additional 3 parentage points compared to low earners. This means they’ll be paying 12% interest until at least March 2023, when interest rates are next revised.
Ben Waltmann, senior research economist at the IFS, said: “Unless the government changes the way student loan interest is determined, there will be wild swings in the interest rate over the next three years.
Nick Hillman, the director of the Higher Education Policy Institute, said: “One modest thing the government could do immediately to ease the situation would be to move to a more respected measure of inflation.
“Four years ago, the Office for National Statistics said RPI was a bad measure of inflation and should not be used in public policy. Now would be a good time to look again at its use for student loans.”
A Department for Education spokesperson said: “Unlike commercial loans, student loans are protected in a number of ways. Monthly repayments for student loans are linked to income, not to interest rates or the amounts borrowed, and borrowers earning below the relevant repayment threshold make no repayments at all.”
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