Student loans to cost more than inflation
New regulations mean that, from September, student loans will no longer be free.
I was mulling over a walletful of ideas for my editor this morning. Each of them was innovative, imaginative or ground-breaking, or would have made you all very rich indeed! Probably all four. But then I forgot them all when I glanced at the inflation (rising prices) figures. To be more precise, it was the Retail Prices Index I saw, which is the most comprehensive measure of inflation.
What caught my eye wasn't that inflation figures had just become deflation (falling prices) figures for the first time since 1960. That's not a surprise after months of declines. What caught my eye was the month they represented: March. This has great significance for people with student loans.
How student loan interest rates are set
It's the March RPI figure that is used to set the new student loan interest rates the following September for the whole academic year. If RPI is 3% in March, you pay 3% interest on your loan six months later for the next 12 months.
It hasn't quite worked like that in the past few months. The Bank of England Base Rate fell so much faster than inflation at the beginning of this year that another clause in the student loans agreements was invoked for the first time. The interest rate for student loans is either RPI or it's the Bank of England Base Rate +1%, whichever is lower. So, for a few months we had rates beneath RPI as a result. Now that the RPI is lower again, things are back to normal.
Are we all set to be repaid by the Student Loan Company then?
Most people have been dubious about what would happen to student loans if inflation went negative. The Government has, as far as I'm aware, avoided clarifying it.
I've just spent all day reading through legislation. (I missed the Budget as a result. That would have been more exciting, and that's saying something.) I went through such legislation as Educations (Student Loans) Act 1990, and Education (Student Loans) (Repayment) Regulations 2000 (for England and Wales, and a little bit for Scotland). I compared these with numerous amendments made in 2002, 2005, and 2007. (That's for England and Wales only. I tried to look through the regulations specific to Northern Ireland and at amendments for Scotland too, but I simply didn't have time to get my head around it. I'm sorry.)
I saw nothing in any of these documents that indicated the interest rate could be positive only.
Enter the 2009 regulations
The Education (Student Loans) (Repayment) Regulations 2009 (England, Scotland and Wales) have a lot of new things to say. You know what's coming right?
As they're new regulations, the document is significantly larger than the usual annual amendments we've been receiving to student loans legislation, quite possibly to hide the important bit. Here it is:
During any academic year, if the Authority determines that student loans will bear interest, loans bear interest at the rate which will result in an annual percentage rate of charge...equal to the percentage increase between the retail prices all items index published by the Office for National Statistics for the two Marches immediately before the commencement of the academic year.
This means that, from now on, the Education Secretary, the Welsh ministers and the Scottish ministers (the Authorities) can determine whether student loans will be interest bearing in any academic year. What do you think they're going to choose to do in September this year? Are they going to pay us 0.4% interest (the RPI is -0.4%), or are they going to decide interest is waived this year?
We get no reassurance from the Student Loan Company either, which seems to be in need of money, if these actions from 15 April are anything to go by. The SLC's statement to me was:
"Now that we know that the RPI is negative, Treasury and DIUS will consider the options and make an announcement shortly. The interest rate is only applicable from 1 Sep 2009, so there is no need for an immediate decision."
In other words, they're all thinking about how they can smooth this over so that it creates the least possible furore. They're acknowledging, at least, that they do have options, which means they don't have to stick with the previous deal that linked loans to RPI and the Base Rate.
However, I'm delving into politics now, which doesn't interest me. Money does.
How this affects you
To that end, let's consider the consequences of a zero rate of interest on your student loan whilst RPI is negative.
Firstly, we sometimes do pay more than inflation already. If the March RPI figure is at a high-point and inflation falls over the next 18 months, you'll pay more than inflation. However, in the years when March is a low point, you pay less than inflation. Overall, it balances out, pretty much.
That is, except this coming academic year. This year you'll be paying a premium of 0.4%. In other words, you're now being charged interest for real.
If prices (and ultimately wages) plummet wildly for a year or two, your debts will become increasingly more expensive.
Let's not over-react though. You're paying just a small premium at present, that's all. At 0%, the loan will remain the cheapest possible debt, so it's nothing to worry about unless deflation gets out of control. What's more likely is we'll be worrying about spiralling inflation soon, as the economy rebounds from low interest rates with the billions of pounds that is being pumped into the system to increase spending.
What you should do
You should continue to use the same old guidance, which I'll summarise now:
- If you have other debts, pay them off first.
- If you have no other debts and have spare money to make overpayments on your student loan, don't! You'll be better off putting the money into a savings account paying 3%+ than overpaying on a debt charging 0%.
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