Student loans will be interest free for many 2012 starters

On principle I hate the fact 2012 uni starters aren’t just going to pay for their education, but for financing it too. For the first time students will be charged ‘real’ interest rates.  This may seem a contradictory start to a blog promising interest free loans, but that’s because, yet again with student finance, principle and practice diverge.

On Monday university application figures are released. Almost certainly they’ll have dropped (though not all will be due to fee fear). One of parents’ key concerns is the interest cost. Yet in reality, a sizeable chunk of graduates in lower-earning professions will not only find their interest set near the rate of inflation, but won’t ever actually need to repay that interest.

Unless you know the system, to make this easier to understand, you’ll find it helps if you first read my detailed Student Loans 2012 myth busting guide. But even if you don’t, you should still get a rough idea from what’s below.

Student loan interest rates

For current graduates the maximum interest rate possible is the RPI measure of inflation, though the rate for most students is much lower than that (see the Should I repay my student loan? guide for details of who pays what).

That means there’s no ‘real’ cost to these loans. If you borrow an amount of cash that’d buy "a shopping trolley’s worth of goods", you repay whatever it costs to buy the same "shopping trolley’s worth of goods" in the future. In other words, borrowing the cash doesn’t alter your spending power.

The 2012 system works rather differently…

• While studying: Interest = RPI inflation + 3% until the April after graduation when it changes to…
• Graduates earning under £21,000: Interest = RPI inflation.
• Graduates earning £21,000 – £41,000: Interest = Rises from RPI to RPI + 3%
• Graduates earning £41,000+: Interest = RPI + 3%.

So the rate is certainly much higher – and as I said earlier – personally I object to ‘real’ rates on principle, yet…

The reality is some students won’t pay it

The amount 2012 starters will repay is dependent primarily on their graduate earnings – for 30 years you pay 9% of everything earned above a threshold which will be £21,000 at first, but will rise with average earnings after. That is far more important for many than the amount they originally borrow.

What that means is many graduates won’t repay what they owe in full before the debt wipes out after 30 years and, at a lower level of earnings, many won’t ever repay what they originally borrowed. I’ve plugged these numbers into www.studentfinancecalc.com where you can work out how much you’ll repay (you can see the mathematical assumptions used to calculate this there too).

As you can see in this table, the only people who pay interest are those on starting salaries above £30,000. Though take the actual numbers with a pinch of salt as the assumptions make a big difference – it’s more the general point that the interest rate only actually impacts on the repayments of some.

Also remember the table assumes people are working for the whole 30 years before the debt wipes – many (especially women) will take some time off during that period, which reduces repayments further.

Though of course for higher earners, it shows the interest can be huge too.

If you’re wondering why those at £50,000 pay less than at £40,000, it’s simply because as they earn more, they repay more quickly, so less interest accrues.

Now of course that doesn’t make it more favourable than the current system – where many more repay all that’s borrowed, because of course the price has shifted higher – but it does mean the fear of the interest at least does need to be mitigated for many students.

Related blogs/ guides

• Don’t pay tuition fees upfront
• Dear teachers, an important message about your pupils’ future
• Stop early redemption penalties