Are increased interest rates turning student debt into a “debt bomb”?

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Are increased interest rates turning student debt into a “debt bomb”?

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Author Ben Leonard

Rise in interest rates

The interest rates on student loans have risen quite dramatically over the past few years. The latest rise sees the interest rate on student loans rise from 4.6 to 6.1%. To compare, the Bank of England base rate of interest has been held at just 0.25% last month.

The highest level of interest that is currently available on an easy-access cash ISA is not much higher, at 1.03%, while a 10-year fixed rate mortgage comes in at 2.49%.

This rise in interest rates is because interest rates for student loans are set at three percentage points above the incredibly volatile retail price index, rather than the consumer price index, which remains quite stable.

In March, the RPI hit 3.1%.

Student debt is structured incorrectly

Many students are hit hard by these interest rates before they have even graduated. Interest starts being accrued on the loan from the moment it is taken out, meaning that many students will already have racked up around £6,000 purely in interest before they have even graduated.

Many have argued that this is countered by the fact that all graduates across the country do not have to start paying back their loans until they are earning at least £21,000 per year. Even once they hit this figure, their repayments are capped at 9% above that amount.

Any debt that is left over after 30 years is scrapped, meaning that the government will not get their money back.

interest rates

Critics of the increased interest rates are arguing that by not intervening, the government is not helping themselves out. As the interest rates are so high on student loans, many will be unable to ever repay the entire amount.

Back in July, the Institute for Fiscal Studies undertook a report that found that students who are starting university now can expect to graduate with more than £50,000 worth of debt.

The IFS also found that of those students who are entering university this year, 77% of those who take out loans with student finance will not earn enough in their entire lifetimes to repay the full amount.

Vice chancellors speak out

The vice chancellors of many universities voiced their concern this week, criticising the rate of interest that students are being charged.

Louise Richardson, the vice chancellor of Oxford University, said the recent increase was “hard to justify” and attacked the government for scrapping maintenance grants. These have been replaced with loans which had the “perverse results of landing poorer students with bigger debts”.

However, the Department for Education didn’t seem to have much to say on the issue and declined to say that they will address it.

Instead, they issued this statement, saying: “borrowers will only pay back what they can afford so no-one will see monthly repayments rise” and “only the highest earners will pay the top rate of interest.”

In June of this year, the total amount of student debt rose to over £1 billion for the first time in the history of the UK.

By | 2018-12-14T09:34:45+00:00 September 7th, 2017|Personal Finance|0 Comments

About the Author:

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Ben is a Journalist with an extensive track record within most media, including TV, radio, press and direct marketing. Specialising in finance and business writing, Ben draws upon his extensive experience to craft compelling articles that provide valuable information to CLNews readers in a format that is easy to understand.