Category: Students

Will a Reduction in Student Loan Interest Rates be Significant?

The UK news has recently stated that there may be a reduction in interest rates in student loans. There are many students and parents of students who are really pleased about this announcement as well as those looking to do degrees in the future. However, how much of a difference will this make to most students?

Student loans in the UK are currently paid back over thirty years and then any remaining balance is written off. The repayments only have to be made once the graduate starts earning above a certain amount, currently £21,000 and will gradually increase as they earn more money. After the thirty years are up, any money that is left owing will be repaid by the government. At the moment many graduates start off on lower incomes and do not increase that quickly. This means that over three quarters of them do not repay their whole student loan by the end of the thirty year term. The interest on the loan is only a small part of what needs to be repaid and so those students that have not paid it all back are unlikely to have repaid the interest anyway and therefore any change in rates will be irrelevant to them. Therefore rate changes will only have an effect on students that are high earners once the graduate.

As student loans are relatively new in the UK many people do not fully understand them and the consequences of different things on them. It is well worth making sure that you completely understand how they work so that you can understand the relevance of any changes that are made to them.

One main worry for students is that the government could change the rules with regards to student loans. This has already happened once when the salary threshold for repaying was fixed at £21,000 when the government had said that it would increase with inflation. Although this may not have huge impact, what is significant is that the government changed the rules. If they do this again, it could have a more significant impact and may affect more people. Also with governments changing so often, within the thirty years term of a loan, there could be changes made which could have a big impact on student borrowers. It is hard to believe that a huge change could happen in one go as it would have a big impact on the popularity of that government, which is something that they will want to avoid. However, a series of small changes could have an impact. Although this can be a worry, it is worth remembering that this type of borrowing is still very much more favourable for most people, particularly the three quarters that do not have to repay the full loan, compared with standard lenders.

Interest rates could change a lot over the years as well. The student loan rates are supposed to reflect inflation and so if inflation increases sharply, then the loan rates will as well. However, this could even out if it falls. The Bank of England do try to keep inflation at a fairly steady level by adjusting quantitative easing and interest rates so chances are the changes will not be that significant anyway.

Whether to get a student loan can be a tricky decision and should be considered with care. It is a good deal compared with other forms of borrowing and if you want a degree or to have the opportunity to get a better paid job, then it is likely to be your only option. As long as you are sure that you will finish the course and that you will use the degree, then it is probably a wise move. The borrowing is not like a standard loan as repayments are taken out of your tax code and therefore you will not have to remember to repay or find the money for it. You will just pay more tax and therefore your net salary will be lower as a result. The good thing is that you will not have to calculate how much you need to pay back or when as the tax office will do that for you.