From September, the interest rate maximum on student loans in England and Wales will be reduced to 6.3%.
It was set to grow to 7.3% following a warning from the Institute for Fiscal Studies (IFS) that students might wind up paying up to 12% in interest.
The current interest rate on student loans is 4.5%, which is derived by adding 3% to the Retail Price Index (RPI).
Students in England and Wales holding Plan 2 (undergraduate) and Plan 3 (postgraduate) loans will be affected by the new lower figure.
If you began an undergraduate study in the UK on or after September 2012, you will be on a Schedule 2 repayment plan.
According to the Department for Education (DfE), the news made today would save graduates and current students hundreds of pounds per year.
It uses the example of a borrower having a £45,000 student loan outstanding.
In comparison to 12% interest rates, the government argues that this person would save roughly £210 per month in accumulated interest.
This is based on the overall loan amount, as monthly repayments do not vary – only the interest rate.
However, the IFS has warned that the new lower ceiling does “absolutely nothing to safeguard present students.”
According to Ben Waltmann, senior research economist at the IFS, “only a minority of, largely high-earning, graduates poised to pay off their debts in full would ever profit from this.”
“Most importantly, this does little to safeguard existing students from growing living costs.”
Monthly student loan payments are determined by income rather than interest rates or loan amount.
If you earn more than the “repayment threshold,” you will normally begin repaying your loan at the start of the tax year following you graduate or leave your course.
When your income exceeds £524 per week, £2,274 per month, or £27,295 per year before tax and other deductions, you begin repaying your Plan 2 loan.
If you have a postgraduate loan, the threshold is when your weekly income exceeds £403, monthly income exceeds £1,750, and annual income exceeds £21,000.
However, the interest rate drop comes ahead of a significant overhaul to the student loan system, which is set to take effect in September 2023.
For anybody commencing a study next year, the repayment threshold will be reduced to £25,000 per year, while the length of time graduates must repay their loans will be increased by ten years.
Interest rates on student loans will be revised again in December.
“We appreciate that many people are concerned about the effect of rising prices, and we want to reassure people that we are moving up to give help where we can,” said Minister for Skills, Further and Higher Education Andrea Jenkyns.
“We utilized forecasted market rates in June to move forward the announcement of a cap on student loan interest rates down from an estimated 12%, and we are now lowering the interest rate on student loans to 6.3%, the rate in effect today, to match with the most recent data on market rates.”