Student loan interest rates are set to rise later this year as a result of the escalating conflict in Iran, making it even harder for graduates to pay down their debts.
Experts are warning that some graduates face being thousands more in debt with years added on to the length of time they must repay their student loans as a result of the strikes on Iran by the US and Israel.
The situation in Iran could push up oil and food prices which will filter through to inflation rates, potentially driving up the Retail Prices Index (RPI) measure.
These rates are used to set the interest on some student loans. Graduates with Plan 2 student loans – who went to university between 2012 and 2022 – face interest rates on a sliding scale from RPI to RPI plus an additional 3 per cent depending on earnings.
Interest rates on student loans are typically set on 1 September each year using the RPI of the previous March. It means a higher rate this month could see the interest rates on graduate debts rise next year.
Last March’s RPI figure was 3.2 per cent but Capital Economics says it currently predicts a rise to 3.6 per cent in March.
It says energy price rises caused by the conflict could push it up to anywhere between 3.8 per cent and 4.1 per cent. This could mean graduates facing interest rates of up to 7.1 per cent.
Paul Dales, chief UK economist at Capital Economics, said: “I would have thought [the conflict] would have an impact on the RPI. The mechanism is that the rise in oil prices would filter through into higher petrol prices over the next few weeks.
“The rise in gas prices won’t influence utility prices until July, however, as that’s when the Ofgem price cap will change next.”
Edward Allenby, senior economist at Oxford Economics, added: “The main impact on inflation will be from higher oil prices affecting fuel prices, although for context, petrol prices only account for around 2 per cent of inflation.
“I can also see modest upwards pressure on food prices due to shipping disruption, while sterling weakening could also have an impact. This could translate to a modest rise in RPI.”
How does higher RPI impact student loan debt?
Student loan repayments are income contingent, meaning the amount you repay is based on your pre-tax income and interest rate changes do not impact the amount you have to repay each month.
However, it does mean the amount that is added to your debt every month increases so you would need to earn more in order to pay off more than is added to your loan balance.
The exact rules depend on what plan you are on, with different plans outlined below.
For those on Plan 2 loans, estimates suggest someone with a typically sized balance would currently need to earn around £66,000 a year to pay off more than the amount of interest added.
If you earned enough to be able to pay down your debt each month, rather than just pay off some of the interest, higher interest rates would mean it would take longer to pay your debt off – so you would pay more over time.
Alice Haine, personal finance analyst at Bestinvest, said: “With interest rates on student loans linked to RPI, and therefore subject to change, shifting interest rate expectations amid renewed conflict in the Middle East will be unsettling for students.
“While RPI has been expected to ease back by the spring, those forecasts may now come under pressure if we see a significant and sustained jump in wholesale energy costs alongside supply chain disruption and air travel challenges.
“Any renewed inflationary pressure could push up the interest rates applied to student loans, at a time when students are already weighed down by heavy interest charges that are making it difficult to make meaningful progress in reducing their loan balance.
“Students felt the impact of higher interest rates on their loans during the cost of living crisis when RPI climbed to dizzying highs. While the interest rate does not affect the monthly repayment as that is decided by income level, it does influence how long it ultimately takes to clear the debt.”
‘I’ve paid thousands towards my student loan but it’s increased by over £16,000 since I graduated’
Gerard Boon is one of thousands of graduates who have been repaying their student loans for years but have watched their overall debt increase in size since they graduated due to high interest rates.
Gerard, who is the managing director at a mortgage broker firm, Boon Brokers, said he left university with £41,207 of debt in 2019 and since then he has paid £9,198 in repayments.
The balance is now £57,685.15 – an increase of £16,478.15 over seven years.“I’ve paid thousands of pounds towards my student loan, but it’s actually increased since I graduated,” he said.
Gerard Boon is the managing director of Boon Brokers“I’m self-employed, so it differs on an annual basis depending on my declared income, but last year I paid £5,913.00 towards my student loan, only to see the interest in the same year increase the balance by £9,829.44.”
Gerard said the prospect of interest rates rising again due to inflation caused by global conflicts is “so unfair”, as it is effectively “punishing graduates for factors outside of their control”.
“The Government should be doing what they can to subsidise education for students, not penalise them when their careers have barely begun. If costs continue to rise for students, the Government should not be surprised if enrollment numbers collapse in the next few years,” he added.
“I think the loan system is very predatory and the Government urgently needs to address this as a priority,” he said.
How much extra interest would higher RPI cost you?
If you had a £50,000 loan balance on a Plan 2 loan and earned £55,000, you would currently repay about £200 per month and this would not change if RPI rises.
If RPI increased from 3.2 per cent to 3.8 per cent, your interest rate would rise to 6.8 per cent. That would mean accruing around £3,400 in interest overall, about £300 extra interest compared to last year.
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If RPI rose from 3.2 per cent to 4.1 per cent, your interest rate would rise to roughly 7.1 per cent.
That would equal around £3,550 interest, £450 extra interest compared to last year.
If you do not earn enough to pay down your student debt, the extra interest will not extend the amount of time it takes for you to pay it off.
But if you were earning enough to repay the interest and a chunk of the actual loan – at least £67,000 – an increase of 0.6 per cent to RPI would add just over one year to the amount of time it would take to pay the loan off.
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