Graduates from past years were surprised to recently learn of an impending reduction of interest on their student loans. Below, we explain why this is happening and what it could mean for you loans.

How Student Loan Interest Works

The Student Loans Company adds interest to your loan virtually from the day you first take it out.

Graduates in England and Wales used Plan 1 before 2012 while those who commenced study after 2012 are on Plan 2. Students in Northern Ireland and Scotland are either on Plan 1 or Plan 4. How much you pay will depend on which plan you are on and where you studied.

More details are below.

How Are the Interest Rates Changing?

Rates change every year in September for Plan 2. It’s adjusted in line with the RPI rate of the previous March. Earlier this month, the government announced the March RPI this year was 1.5%. That’s down from 2.6% in 2020.

•         Students in England and Wales on Plan 2 were paying 5.6% until now. From September, the interest rate will be 4.5%
•         Things are unlikely to change in Scotland and Northern Ireland due to the different funding methods used. They use Plan 1 and Plan 4 which has a fixed interest rate of 1.1%
•         Students in England and Wales who graduates before 2012 and are still paying off their student loans are also unlikely to see any changes

Worth noting that Scottish students currently on Plan 1 will move to Plan 4 from September but there is no change in the interest rate currently planned.

Why is this Happening Now?

Plans 1 and 4 are unlikely to change because they’re set at the Bank of England Base Rate plus 1%. As the base rate has been 0.1% for some time now, that is unlikely to change for the time being. However, never say never – it’s late July and there is still time. Back when the pandemic hit the UK, the Bank of England changed the base rate twice in a month (March 2020).

Plan 2 pay an interest rate of RPI plus 3%. As stated above, that was 2.6% (plus 3%) but will reduce to 4.5% in September 2021 (1.5% plus 3%).

Benefits and Drawbacks

Don’t go opening the champagne just yet. If you’re close to your loan getting wiped due to the 25-year expiry and have a small amount left to pay, you may end up paying off more than you otherwise would.

Also, if you’re many years away from paying, you likely won’t notice a huge difference. The interest rate may change many times in the coming years. All you will find is a slight reduction now in the amount you pay off, and one that will unlikely make a significant difference to your pocket.