Government to increase student loan interest rates by 0.2%

Interest rates on student loans in England, Wales, and Northern Ireland are set to rise to 6.3%, in a move that has aroused controversy in some quarters.

For current students the interest rate will rise from 6.1% to 6.3%. For those who have graduated rates will vary from 6.3% for the highest earners to 3.3% for those with the lowest income (up from 3.1%).

This change does not affect the rate of mandatory monthly repayments, which will remain at 9% of everything earned above £25,000.

The measure of inflation used in calculating the rise, the retail price index (RPI), has long faced criticism, with opponents of the hike noting that RPI is typically higher than other measures of inflation and fails to take into account some forms of household costs.

RPI has not been considered a national statistic since 2013, and the Office for National Statistics advises against its use.

The government has adopted the consumer price index (CPI) for calculating the rate of increase in benefits and pensions, but continues to use RPI for student loans.

The change is only likely to affect high-earning graduates, since lower earners typically do not pay off enough of their student loan to begin paying off the interest before having it wiped off after 30 years.

The Institute for Fiscal Studies notes that increases in interest mean that the highest-earning graduates “essentially cross-subsidise the education of lower-earning graduates”.

Its director, Paul Johnson, tweeted: “Government should not link these interest rates (or anything else) to the RPI – a measure of inflation which is overstated, which has had national statistics status withdrawn, and which is so flawed that the National Statistician has advised it should not be used.”

A spokesman for the government said that RPI “has always been used for calculating interest on student loans. Student loans are not like commercial loans as they have more favourable terms, including repayments being linked to income and not to the amount borrowed.”

He also made reference to the recent raising of the threshold for loan repayment, saying that “Our decision to raise the minimum repayment threshold for student loans to £25,000 is saving 600,000 graduates up to £360 per year from this month.”

The government’s review of post-18 education, due to conclude next year, will investigate the role of interest rates in student loan repayment.