|
||||
| Student loans: rates soar 4% |
Millions of graduates and university-goers will see the cost of their student loan debt soar next month.Around 3.3 million with an outstanding balance currently pay no interest, while the 400,000 who first took out a loan before 1998 pay minus 0.4%, meaning they get money back.
From September, those with a pre-1998 loan will see their rate soar to 4.4%. Rather than getting paid £20 a year on a typical £5,000 debt they’ll be charged £220 on that sum – a £240 swing.
It is still unclear exactly what the rest will pay, though we will find out this month. The rules state interest on newer loans is based either on the previous March’s Retail Prices Index (RPI) inflation measure or base rate plus one percentage point, whichever is lower.
March’s RPI stood at 4.4%, so with base rate currently at 0.5%, that should produce a 1.5% interest rate.
However, when the rate should have fallen to -0.4% last September, as RPI was negative, the Government introduced a 0% rate so it may bend the rules again.
The reason for the rise in pre-1998 loans to 4.4% next month is because that rate is directly pinned to the previous March’s RPI.The Government changed the student loans system in 1998, when tuition fees were introduced, which explains the rate differences.
With rates set to rise, especially for those with pre-1998 loans, experts say those with spare cash should consider overpaying.
If paying 4.4% interest, as a basic rate taxpayer, you would need to earn 5.5% interest in a savings account, or 7.3% as higher rate payer, to earn more than the interest is costing you. This is virtually impossible at present.
At 1.5% interest, you would need to earn 1.87% as a basic rate taxpayer or 2.5% as a higher rate payer, which is possible, but requires shopping around.
Danny Cox, from financial adviser firm Hargreaves Lansdown, says: “Repaying the loan is the best action for many.”
Recent graduates should ensure they have a graduate current account that offers a 0% overdraft, to help manage student overdraft and credit card debt (see table of accounts).
Even if you already have an account, you can often switch, though you will need a decent credit score to get an overdraft. The best way to do that is to pay card payments on time.
|
