Student season: What’s the REAL cost of student loans?

Iona Bain

Going up to uni this Autumn? You may be – understandably – worried about the price tag for your degree.

Or perhaps you’ve recently graduated and want to know how much you’ll be paying back on your student loan.

So what’s the damage? Maike Currie, associate investment director at Fidelity Personal Investing, explains how student loans work and what the interest charges look like.

She says: “Repaying a student loan is linked to earnings and it is important students understand how interest is calculated. For those who started university after September 2012, the level of interest charged on student loans is linked to the RPI measure of inflation and begins accruing the moment the loan is taken out. The interest rate is updated once a year in September, using the RPI measure of inflation from March plus a maximum of 3%, depending on how much a student earns.

“RPI stood at 2.5% in March 2014 so adding up to 3% puts the maximum interest repayment at 5.5%. This is quite a difference compared to those who took out student loans prior to September 2012 as they pay a flat interest rate of 1.5%.

But there is some good news – RPI dropped to 0.9 per cent by March this year, which means the maximum interest rate will fall to 3.9 per cent.

She added: “Class of 2015 graduates only have to repay the loan the April after they graduate and once they start earning over £21,000 a year. Monthly repayments are 9% of any income over £21,000, so say they’re earning £25,000, you will pay back 9% of £4,000 a year.”

So to recap:

  • Interest on your loan is linked to RPI
  • The rate is updated every September, based on the RPI measure of inflation in March
  • Up to 3 per cent is added on top depending on how much a student earns
  • Graduates this year can expect to pay 3.9 per cent on their loans from this April
  • Student loans are only paid back once graduates start earning over £21,000

As part of student season, we’ll be offering more tips on managing your money at uni and how your parents can help…so watch this space.

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