Ministers have intervened to cut student loan interest rates for the second time this summer as inflation and the cost of living continue to soar.
The Department for Education announced on Wednesday that the maximum rate will now be fixed at 6.3% from September. It was already due to be capped at 7.3%, after an intervention by ministers in June to bring it down from the 12% it would have reached by September, based on earlier inflation figures plus 3%.
The DfE said the new 6.3% rate would mean a borrower with a student loan balance of £45,000 would reduce their accumulating interest by about £210 a month compared with 12% interest rates. This is on the total value of the loan.
Monthly student loan repayments are calculated by income, rather than interest rates or amount borrowed. Graduates pay 9% of their income above a repayment threshold of £27,295 a year.
The Institute for Fiscal Studies (IFS) welcomed the move but said it was the wealthiest graduates who would benefit and warned it would do nothing to protect current students from the rising cost of living.
The IFS’s senior research economist, Ben Waltmann, said: “This is welcome news for graduates: recent graduates with a typical student loan balance will see about £100 less in interest added to their balance over the first three months of the coming academic year compared with the policy as announced in June.
“However, only the minority of mostly high-earning graduates set to pay off their loans in full will ever actually benefit from this; most graduates’ repayments will never be affected. And even graduates who do pay off in full will typically not see their repayments fall for decades yet.
“Importantly, this does nothing at all to protect current students from the rising cost of living. Merely because of errors in inflation forecasts, student living cost support is set to reach its lowest level for at least seven years in the coming academic year.
“Unless the government changes course, students from the poorest families will be at least £100 out of pocket a month.”
Andrea Jenkyns, minister for skills, further and higher education, said: “We understand that many people are worried about the impact of rising prices and we want to reassure people that we are stepping up to provide support where we can.
“Back in June, we used predicted market rates to bring forward the announcement of a cap on student loan interest rates down from an expected 12% and we are now reducing the interest rate on student loans further to 6.3%, the rate applying today, to align with the most recent data on market rates.”
A spokesperson for the Student Loans Company said the change in interest rates would be applied automatically. Student loan interest rates will be reviewed again in December.