For most people who want to go on to higher education, taking out a loan from the Student Loans Company is a necessity. Not only do you have the cost of living to worry about, but tuition fees in England and Wales are notoriously high.
Because you don’t have to pay off your Student Loan until you leave university, it can be tempting to take one out without fully understanding it; telling yourself, you’ll worry about paying it back at a later date. But as with any loan, it’s important to understand how much you might have to pay back.
This is why we’ve written this article, which explains Student Loan interest rates in detail. In it, we’ll reveal how Student Loan interest rates are calculated, give you an idea of how much Student Loan interest you’re likely to be charged depending on the type of loan you’ve taken out and break down the costs of going to university, so you can decide whether or not it’s worth the debt.
Depending on the Bank of England’s Base Rate, interest rates for Plan 1 or Plan 4 Student Loans could go up, however, this doesn’t apply to Plan 2 and Plan 3 Student Loans.
While Plan 1 and Plan 4 Student Loan interest rates are determined by the Bank of England’s Base Rate as well as the Retail Price Index (RPI), Plan 2 and Plan 3 Student Loans depend solely on the RPI. However, the government has capped the interest rate for Plan 2 and Plan 3 Student Loans at 6.3 per cent until December 2022, meaning it won’t go up until then.
Read on to find out how much interest you could be paying, depending on what type of loan you’ve taken out.
The RPI is what the Office for National Statistics (ONS) uses to measure inflation. It shows the price increases and decreases across the UK in the past 12 months. RPI has always been used to calculate interest on Student Loans, and when RPI rises and falls, interest rates do too. However, the role that RPI plays in your Student Loan interest depends on which type of loan you’re on. We go into the different Student Loan interest rates in more detail below.
But as inflation and the cost of living continue to increase, the government has had to put a cap on Plan 2 and Plan 3 interest rates to protect Student Loan borrowers. If the government hadn’t introduced this maximum amount, borrowers would have been faced with a Student Loan interest rate of 12 per cent. This cap will ensure that the interest rates on these types of loans are in line with the market rates for personal loans.
From September 2022 to the end of November 2022, interest rates for Plan 2 and Plan 3 Student Loans are capped at 6.3 per cent. From 1st December 2022, the rate will go up to 7.3 per cent — unless the Prevailing Market Rate (PMR) continues to be below this level.
Interest rates may have risen, but it doesn’t mean your monthly Student Loan repayments will also increase. This is because, unlike with personal loans, your repayments are linked to your income rather than to interest rates or the amount you’ve borrowed.
It’s worth noting here that because interest rates only affect the total value of the debt and not the amount you repay each month, the higher rates will only affect borrowers who will repay their loans in full or those who get close to doing so. In other words, the highest-earning graduates or those with small outstanding balances.
If you earn below the relevant threshold, you will continue to not have to make any repayments, despite any change in interest rates. Any outstanding Student Loan balance will also be written off at the end of the term, with no extra cost to you.
The Student Loan plan you’re on depends on which country gave you the loan and when you went to university:
- Plan 1 — If you took out a Student Loan in England or Wales between September 1998 and August 2012, or any time since September 1998 in Northern Ireland, you’ll have a Plan 1 Student Loan. You’ll have gained less interest than those with a Plan 2 loan but your monthly repayments will be more.
- Plan 2 — If you took out a Student Loan for an undergraduate, Level 4/5 or PGCE course on or after 1st September 2012, you’ll have a Plan 2 Student Loan. As well as paying more in fees, you may be charged more in interest too, but your monthly repayments will be less, and your debt will be written off after 30 years.
- Plan 3 — If you took out a postgraduate loan in England or Wales, it will be a Plan 3 Student Loan.
- Plan 4 — If you are/were a Scottish student who started a degree in the UK on or after 1st September 1998, or you are/were an EU student who started a degree in Scotland no later than the 2020/21 academic year, your loan will have been moved to a Plan 4 Student Loan. This type of loan is exclusive to Scotland and was introduced in April 2021. The only difference between a Plan 1 and Plan 4 loan is that the threshold for repayment is much higher.
Interest rate for Plan 1 Student Loans
The interest rate for Plan 1 Student Loans is set according to which is lowest between:
- The RPI rate from March that same year
- The Bank of England base rate plus one per cent
This means that for the 2022/23 academic year, the interest rate on Plan 1 loans is 2.75 per cent. This is because the Bank of England base rate is 1.75 per cent, so if you add one per cent to that, it makes 2.75 per cent, which is lower than the March 2022 RPI figure of nine per cent.
This Plan 1 Student Loans rate is set every September, however, it can change before its September review if the Bank of England changes the base rate.
The interest rate for this plan is the same whether you’ve graduated or you’re still studying.
Interest rate for Plan 2 Student Loans
Unlike Plan 1 Student Loans, the interest rate for Plan 2 loans varies depending on whether you’ve graduated or you’re still studying:
- While you’re studying — Until the April after you’ve graduated, the interest rate on your loan is RPI plus three per cent. RPI in March 2022 was nine per cent, which meant the rate for the 2022/23 academic year was set to be 12 per cent. However, because of PMR, this figure was capped at 6.3 per cent in September 2022 for all loans. Again, this figure usually changes every September, but if RPI decreases or market rates increase, it’s likely that the government would revert to the usual method of determining rates.
- Once you’ve graduated — When you finish your course, the interest rate on your loan will be RPI if you earn £27,295 or less or RPI plus a percentage between nought and three per cent if you earn more than £27,295. This percentage rises in line with your earnings and will be capped at three per cent if you earn more than £49,130.
Interest rate for Plan 3 Student Loans
Plan 3 Student Loan interest rates work in much the same way as Plan 2 interest rates. Interest is normally charged at RPI plus three per cent, but this could change depending on high inflation, meaning there could be a cap on the rate you pay.
The difference between Plan 2 and Plan 3 loans is that Plan 3 repayments will be a smaller percentage of your earnings and the threshold for repayment is lower.
Interest rate for Plan 4 Student Loans
Before the Plan 4 Student Loan was introduced, Scottish students repaid their Student Loans under Plan 1. Plan 4 loans have many similarities to Plan 1 loans, including how interest is calculated.
As with Plan 1 Student Loans, the interest rate is set according to which is lowest between:
- The RPI rate from March that same year
- The Bank of England base rate plus one per cent
Again, the 2022/23 interest rate for a Plan 4 Student Loan is 2.75 per cent, and this is the same whether you’ve graduated or you’re still studying.
According to government statistics, £20 billion is borrowed by 1.5 million students in England each year. By the end of March 2022, the value of outstanding loans reached £182 billion and the forecast average debt of borrowers who began their course in 2021/22 will be £45,800 by the time they finish.
With that in mind, you may be wondering where all that money goes and whether it’s worth getting into student loan debt. To help you make your decision, here’s a breakdown of what your typical university costs might be:
|Expense||Cost per year||Cost over three years|
|Health and wellbeing||£150||£450|
|Gifts and charity||£130||£390|
*This figure is higher than the government’s student debt figure, however, it’s worth pointing out that not all students rely solely on loans to cover their living costs. Some work part-time jobs or receive financial help from their parents, while others come to university with savings.
The interest rate you pay on your student loan depends on whether you have a Plan 1, Plan 2, Plan 3 or Plan 4 loan. Plan 1 and Plan 4 loans take into account the RPI and the Bank of England Base Rate, while Plan 2 and Plan 3 loans depend solely on the RPI. For the 2022/23 academic year, Student Loan interest rates are currently set at 2.75 per cent for Plan 1 and Plan 4 loans and 6.3 per cent for Plan 2 and Plan 3 loans.
Usually, Student Loan interest rates are set in September, but they could change before their review date if inflation and the cost of living increase too much. For example, the government put a cap on Student Loan interest rates from September 2022 to December 2022 in order to protect borrowers. If the government hadn’t introduced this maximum amount, borrowers would have been faced with a Student Loan interest rate of 12 per cent.
While it is important to understand what interest rate you’ll be paying on your Student Loan, it’s worth noting that because the debt for most borrowers is so big and the repayments are so small, in many cases, the full amount won’t ever need to be paid back in full. The only people these interest increases will affect are the highest-earning graduates or those with small outstanding balances.