To ask the Secretary of State for Education, what assessment he has made of the implications of projected increases in student loan interest rates exceeding that paid by homeowners on mortgages.
25 April 2022
The mechanism for setting student loan interest rates is set out in legislation. The interest rate for Plan 2 and Plan 3 loans are set annually with reference to the Retail Price Index (RPI) from the previous March. The rates take effect from 1 September.
The March RPI figure this year is a demonstration of the unusual events currently affecting all aspects of the economy and our society. The government has not yet made a decision on what interest rates will be applied to student loans from September. We will be considering all options over the coming months and will confirm in due course the rates to apply from 1 September.
Student loans remove financial barriers to higher education (HE). Unlike commercial alternatives, student loans are available to all eligible students, regardless of background or financial history. Student loans offer unique protections to borrowers. Monthly repayments are calculated as a fixed percentage of earnings above the relevant repayment threshold and do not change based on interest rates or the amount borrowed. If income is below the relevant repayment threshold, or a borrower is not earning, then they do not have to make repayments at all. Any outstanding debt, including interest accrued, is written off after the loan term ends (or in case of death or disability) at no detriment to the borrower. There are no commercial loans that offer this level of protection.
Interest rates affect lifetime repayments only for those who will repay their loans in full within the loan term (or who come very close to doing so), principally high earners and/or those with small loan balances. Currently, only 23% of borrowers who enter full-time higher education next year are forecast to repay their loans in full.
To further protect borrowers the government, by law, must cap maximum student loan rates to ensure the interest rate charged on the loan is in line with market rates for comparable unsecured personal loans. The government monitors student loan rates against the Bank of England’s data series for the effective interest rates on new and existing unsecured personal loans. It is misleading to compare student loan interest rates to rates for mortgages or other loans secured against assets.
We are determined that the cost of living should not deter those from less advantaged backgrounds from applying to and thriving at university a record number of students from disadvantaged backgrounds were accepted onto HE courses in 2021. Students can also benefit from many of the measures this government has taken to help with the cost of living, including raising the National Minimum Wage, reducing VAT, freezing alcohol and fuel duty, the Energy Rebate Scheme and capping the cost of energy.
We announced in February that we will be reducing interest rates for new borrowers and so from the 2023/24 academic year, new graduates will not, in real terms, repay more than they borrow. Alongside our wider reforms, this will help to make sure that students from all walks of life can continue to receive the highest-quality education from our world-leading HE sector.