How do student loan interest rates affect you?

How do student loan interest rates affect you?

Interest on student loans is rising again – but it might make less difference than you think.

Inflation on student loans is based on inflation – a measure of changes in how much things cost. If prices are going up, the interest on your loan goes up to match – and the government adds an extra 3% annual interest on top.

This year, inflation has hit 3.3%, making the total interest rate 6.3%. However, this doesn’t make a difference to how much you’ll repay each month. Your repayments are based only on what you earn: you’ll pay back 9% of what you earn over £25,000 a year.

Higher interest could mean you make repayments for longer, and end up repaying more overall – but if you haven’t paid off the entire loan after 30 years, the debt gets written off. That means that unless you earn enough to pay your loan back, the higher interest rate probably won’t make a difference to your finances.

Student loan interest is also different for different people:
  • After you finish university, your interest rate depends on how much you earn. The extra 3% comes in gradually once you’re earning over £25,000 a year, and doesn’t reach the maximum until you’re earning £45,000.
  • If you started studying before 2012, your interest rate is 1.50% – but your repayments will start at £18,330 instead of £25,000.
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