© Copyright 2008 www.studentfinances.org.uk
Tuesday, 23 December, 2008
Interest rates on student loans are to be cut, following recent rate reductions from the Bank of England.
The interest rate on student loans from the Student Loan Company is usually set as the retail price index (RPI) measure of inflation in March for the following year starting in September.
However, the small print of the Consumer Credit (Exempt Agreements) Order 1989 stipulates the interest rate on a student loan cannot be over one per cent over the Bank of England base rate.
RPI in March last year stood at 3.8 per cent, so the cut in interest rates to two per cent from the Bank of England earlier this month, means student loan rates must now drop to three per cent.
March saw much controversy over the setting of the rate of interest on student loans as RPI was particularly high – with some students complaining they were paying more interest on their loans than on their savings.
However, next March could see a turn around in the situation. With falling oil prices and cuts to interest rates reducing mortgage payments, RPI is expected to head to zero and could even be in negative territory by March.
Speaking last month, a spokesperson for the Department of Universities, Innovation and Skills (DUIS), which sets the rates for student loans, explained RPI will continued to be used – even if it drops to zero. He said: "We always use RPI to set rates on student loans and this remains the case."
However, the department seemed unsure about how to deal with a case where RPI is negative. "Ministers will be considering options should RPI ever to go negative and will make a decision in due course," a spokesperson later said.
If no rules changes were made and RPI was negative in March - technically students could earn interest on their loans rather than pay interest, as the current rules stand.
Source: http://www.myfinances.co.uk/