Question to the Department for Education:

To ask the Secretary of State for Education, what assessment he has made of the potential effect of trends in the level of interest on student loans on people repaying those loans during the cost of living crisis.

No student loan borrower will be paying more per month as a result of changes to interest rates. Monthly repayments are calculated as a fixed percentage of earnings above the relevant repayment threshold and do not change based on interest rates or the amount borrowed.

The mechanism for setting student loan interest rates is set out in legislation. Interest rates for post 2012 (Plan 2) and Postgraduate (Plan 3) loans are set annually with reference to the Retail Price Index (RPI) from the previous March. The rates take effect from 1 September each year.

Student loans offer unique protections to borrowers. Monthly student loan repayments are calculated by income rather than by interest rates, or the amount borrowed. If income is below the relevant repayment threshold, or a borrower is not earning, then they do not have to make repayments at all. Any outstanding debt, including interest accrued, is written off at the end of the loan term, or in case of death or disability, at no detriment to the borrower. There are no commercial loans that offer this level of protection.

To further protect borrowers, the government, by law, must cap maximum student loan rates to ensure the interest rate charged on the loan is in line with market rates for comparable unsecured personal loans. The government monitors student loan rates against the Bank of England’s data series for the effective interest rates on new and existing unsecured personal loans.

In June 2022 the government set interest rates at a maximum ceiling of 7.3%, for the duration of the 2022/23 academic year, in line with forecast market rates, to protect student loan borrowers on Plan 2 and Plan 3 loans. The government confirmed that should the actual Prevailing Market Rate (PMR) turn out to be lower than forecast, a further cap would be implemented to reduce student loan interest rates accordingly. From 1 September 2022 to 30 November 2022, reflecting a lower than forecast PMR, the maximum interest rate is set at 6.3% for all Plan 2 and Plan 3 borrowers.

On 9 November it was further announced that from 1 December 2022 to 28 February 2023 the maximum interest rate will be set at 6.5% for all Plan 2 and Plan 3 loans, reflecting the most recent PMR.

From the 2023/24 academic year, student loan borrowers starting new courses will benefit from interest rates of RPI only. This change ensures that, under the new Plan 5 loan terms, new borrowers will not repay more than they originally borrowed, when adjusted for inflation.