The Student Loans Company has announced that the interest rate on its loans will be 0% from September.
The new interest rate will apply from September 1st this year, until August 31st in 2010.
Previously the rate was tied to the Retail Price Index (RPI), a measure of inflation. This meant that, in real terms, the amount that graduates had to pay back to the government was the same that they had originally borrowed.
However, the RPI has dropped into negative territory, at -0.4% in March. Had the Student Loans Company keep the interest rate pegged to the RPI, it would have actually reduced the total amount needed to repay.
The Student Loans Company said: “it would be difficult to justify to taxpayers a situation whereby students take out loans in 2009/10 and their balances are immediately reduced.”
The £15,000 threshold before graduates start to make monthly repayments has been kept the same. Balancing out the 0% interest rate on loans, it will not be reduced (as would have happened had they kept the link to the RPI).
Over the lifetime of the loan, highs and lows in the March RPI will even themselves out. In March 2007, the RPI spiked at 4.8% compared to 2.4% the previous March. Why should people making repayments be hammered when the RPI is high, and then not benefit when the RPI is low or negative?
Regarding the SLCs statement:
“..it would be difficult to justify to taxpayers a situation whereby students take out loans in 2009/10 and their balances are immediately reduced.”
Former students paying back their loans are taxpayers as well!