What Does the Recent Student Loan Interest Cap Mean for You?

You may have heard the recent news that student loan interest rates are to be capped at 6.3% from September 2022. If you took out an English or Welsh postgraduate loan (either for a Masters or a Doctoral programme), this applies to you!

You might be anxious or worried about making your monthly payments with the rise in cost of living, especially with the initial 12% interest rate that was proposed earlier in 2022. So 6.3% seems a lot better right? Although it is an increase from the current 4.5%. But what does it actually mean?

Well, in all honesty . . . very little. Here’s why.

Your monthly repayments are linked to your income, not interest rates. They’ll only change if your income changes. If you earn more, you’ll pay back more each month. If your salary drops, so will your monthly repayment amounts.

What the interest rate does change is the total amount you owe. It simply means that you’ll be accumulating less interest between September and November 2022 than was originally thought, meaning your overall payment will be less. The interest rates will be reviewed again in December 2022 and could change at that point.

It’s worth remembering that any outstanding debt will be wiped (usually after 30 years). But there are a lot of terms, phrases and percentages flying around at the moment so here’s a bit more info if you’re feeling confused or concerned.

But just remember . . . this news doesn’t change your monthly repayments.

What are the different plans?

Sometimes people refer to undergraduate and postgraduate loans, and other times you’ll see references to Plan 2 and Plan 3.

Plan 2 is essentially the undergraduate loan. It covers undergraduate, Level 4/5 and PGCE courses beginning on (or after) 1 September 2012. It also includes anyone who took out an Advanced Learner Loan.

Plan 3 refers to postgraduate loans. You may see the terms used interchangeably. Just know that postgraduate loans cover Masters and PhD and Plan 3 refers to these too.

What is the prevailing market rate?

As part of the student loan legislation, there's something called the "Prevailing Market Rate" cap. This means that if student loan interest rates are higher than what commercial lenders are charging, then they’ll be capped.

Because the English and Welsh postgraduate loan interest rates are partly based on inflation, and inflation is currently very high, we had thought it would be increased to 12% in September. As it happens, it’s only 6.3%, yay!

Why am I seeing 7.3% in the news too?

Back in June, the government said the rate would be capped at 7.3% to try to put everyone’s minds at ease. This has now been updated to 6.3% with the new announcement.

You may also like...