Students and graduates are facing an “eye-watering” 12% interest rate on their loans from September due to rising inflation, analysis has found.
The retail price index (RPI), a measure of inflation used to calculate interest on student loans in England and Wales, reached 9% in March.
Interest on loans taken out since 2012 is typically adjusted each September at the rate of RPI during the previous year – with up to three extra percentage points depending how much a graduate earns.
Graduates earning £27,295 or less will see their interest rates soar from the current 1.5% rate to 9%, according to the Institute for Fiscal Studies.
The maximum interest rate – paid by those earning £49,130 or more – will increase from current rates of 4.5% to 12%.
Such graduates with a typical loan balance of about £50,000 would be left with an extra £3,000 in debt, the IFS said.
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“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,” said Ben Waltmann, the IFS’s senior research economist.
“The maximum rate will reach an eye-watering level of 12% between September 2022 and February 2023.”
He said interest rates on student loans “should be low and stable, reflecting the government’s own cost of borrowing”.
“The government urgently needs to adjust the way the interest rate cap operates to avoid a significant spike in September,” he added.
For students beginning degree courses from 2023, the rate will be fixed at a lower level in England, at just the rate of inflation.
Last week, the IFS said students who expect to earn more could save about £20,000 a year if they delay starting university until the interest rate changes kick in.
The decision was made as part of the largest changes to the student loan system since 2012.
The Treasury previously announced that students in England will be asked to repay their loans for up to 40 years from 2023 in England rather than the current 30-year period.
Any unpaid student loan balances after the repayment period ends are written off.
‘This is a policy disaster’
The IFS warned that skyrocketing interest payments this autumn could put some students off going to university.
Jo Grady, general secretary of the UCU Union, said: “It simply cannot be right to saddle students with tens of thousands of pounds worth of debt and then subject them to the whims of volatile markets and rocketing interest rates.”
“Today’s news will leave those already repaying their student loans preparing twitfor increased debt payments during a cost-of-living crisis and force others to consider whether a university education is worth the cost at all.
“On any level, this is a policy disaster.”
A Department for Education spokesperson said: “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.”
