Student loans to go interest-free for one year

The Student Loans Company has announced this week that they will apply 0% interest rate on student loans across the UK from 1st September 2009 – 31st August 2010.

Since the creation of student loans, the interest rate has been matched to the March Retail Price Index (RPI) which gives an indication of inflation. However, this year, the RPI was at -0.4%, showing that Britain’s economy had entered deflation. It was thought that this could mean that, rather than being charged interest, students would accrue interest on their loans at 0.4%, helping to reduce their debt.

However, the law allows the Government not to set an interest rate, so this option has been taken instead, effectively making the rate 0%. The rate of repayment will remain 9% of earnings over the income threshold of £15,000, so students will effectively be paying off their loans faster during the coming period that in the current period where interest is being charged at 4.8%.

According to a statement on the Student Loans Company website:

“The decision has been taken because loans are already well subsidised, and it would be difficult to justify to taxpayers a situation whereby students take out loans in 2009/10 and their balances are immediately reduced. “

“The repayment threshold will also remain at £15,000 for the next 12 months. Had the Government used a negative RPI rate to calculate this, the threshold would have reduced and borrowers would have started repaying earlier and ended up paying more. Setting interest at 0% has prevented this from happening.”

“This will affect those who have an outstanding student loan taken out after September 1998 as well as applicants for both maintenance loans and tuition fee loans in the current and next academic year.”

Responding to the decision, NUS President Wes Streeting said:

“We are pleased that the government has listened to NUS’ concerns about how badly graduates are being affected by the current economic crisis. In the context of a recession, this is the best deal students and graduates could have expected. NUS will continue to monitor the rate of interest on student loans, and make sure the government is aware of students’ concerns.”

“In addition, we repeat our call for the government to look carefully at the issue of the rate used to calculate interest on student loans in the forthcoming wider review of higher education funding and student support.