UK to cap interest on student loans after fears of 12% hike

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Borrowers faced a 12% interest rate in September (Alamy/PA)

Interest rates on student loans will be capped at a maximum of 7.3% for one year to hedge against soaring inflation, the government has announced.

Borrowers were facing a 12 per cent interest rate in September due to a rise in retail price index (RPI) inflation, the Department for Education (DfE) said.

However, the government decided to intervene before the date when student loans are usually confirmed for the coming year in August, to “provide more clarity and peace of mind for graduates at this time”.

The cap, applicable from September 2022, will not affect monthly repayments, which are income-based.

Rather, it means that people who took out loans will owe less over the long term than they would have had interest rates not been capped below 12%.

The DfE described the move as “the biggest ever reduction in student loan interest rates”.

    (PA wire)

(PA wire)

He said this would mean, for example, that someone with a balance of £45,000 would reduce their accrued interest on the full value of the loan by around £180 per month, against interest rates of 12%.

The change affects those who receive Plan 2 (first cycle) and Plan 3 (third cycle) loans.

Michelle Donelan, Minister for Higher and Further Education, said: ‘The government has always been clear that where it can help drive up prices we will, and I will always strive to get a fair deal for students, which is why we have reduced the interest rate on student loans down from the expected 12%.

“I want to reassure that this does not change the monthly repayment amount for borrowers, and we have brought this announcement forward to provide more clarity and peace of mind for graduates at this time.

“For those starting graduate school in September 2023 and all students considering this next step at the moment, we have reduced future interest rates so that no new graduate will ever have to pay back more than what he borrowed in real terms.”

In February it was announced that students starting university courses in 2023/24 will have to start paying back their loans once they earn over £25,000.

Interest rates will be reduced for new students so that their loan balance increases with the rate of inflation.

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