The Student Loan Interest Rate Debate

Credit: neamb.com

Higher education can be expensive. Students all over the UK tend to face financial difficulties during their time at university, with tuition fees alone being around £9,250 a year for most universities - not to mention rent, food, transportation costs, and other general living expenses when it comes to university. On average, 74% of students receive a student loan before entering university, but only 25% manage to pay the loan back fully within 30 years.

The student loan interest rate is the rate at which the loan will increase every year, and usually tends to increase in line with inflation, seeing that the number is predicted to be 3% greater than the RPI rate. The Institute of Fiscal Studies (IFS) forecasted a rise from the current rate of 4.5% per annum to 12% per annum - a substantial increase which would likely have to result in students heavily cutting back on finances or increasing those who do not end up repaying their loan in full. Many blame the economy’s inflationary pressure on the grounds that the figure has skyrocketed from 5.2% in January to the 9.1% it is today

Fortunately, as of 11th June 2022, rates have been capped at 7.3%, with higher education minister Michelle Donelan saying the cap will provide ‘peace for graduates’ and that it ‘brings student loan interest rates in line with the forecast prevailing market rates.’ The government’s Department for Education indicates that a borrower with a student debt of £45,000 would have their interest rate payment fall by £180 a month, owing to the cap set. 

The conflict risen from this is that the National Union of Students cites the cap is ‘still cruelly high’, with the looming debt resulting in unfavourable credit scores in the future. The IFS also expresses that this cap will mainly benefit wealthy graduates or those who gain extremely high-profile work, the reasoning behind this being that they’re more likely to pay off their debt, with those earning a smaller amount paying marginally less than others and still repaying well into their 40s or having the debt written off 30 years after their qualification is achieved.

Will we see a change in those going to University?

It’s all about the forces of demand and supply. Looking at general goods and services, if the price of commodity increases, demand for it goes down. Theoretically, the same can be said about university - high price equals low demand, but a university education is considered a “secure” investment with lifelong utility, resulting in “a massive influx of applicants” as soon as there is uncertainty.

A rise in the level of degree apprenticeships as of recent beg to differ, with students preferring to gain experience in the world of work alongside studying for a university degree, in order to stand out from other applicants and possibly gain higher job security. The ONS shows a 27% increase in the number of applicants between the 2021 - 2022 and the 2020 - 2021 academic years and is only forecasted to rise in upcoming years. In Layman’s terms, people are turning to substitutes, while some argue that over time applications will dramatically fall, with the negatives outweighing the positives massively.

By Poorva Bharambe