Student loan interest could be wiped away

Saturday, 22 November 2008 12:04

The interest rate on student loans could be wiped away next year as inflation is set to drop to below zero per cent and people could start earning money on their loans.

Student loans are linked to the retail prices index (RPI) measure of inflation each March - which the Bank of England last week warned could become negative.

Official figures this week show RPI fell to 4.2 per cent in October, down from 5.0 per cent in September.

Interest rates on student loans are set in March for the following September based on RPI.

A spokesperson for Department for Innovation, Universities and Skills (DIUS), which informs the Student Loan Company of the rates it can charge, maintained RPI will be used - even if it drops to zero.

He said: "We always use RPI to set rates on student loans and this remains the case."

However, the department seemed unsure about how to deal with a case where RPI is negative.

"Ministers will be considering options should RPI ever to go negative and will make a decision in due course," a spokesperson later said.

If no rules changes were made and RPI was negative in March - technically students could earn interest on their loans rather than pay interest, as the current rules stand.

A series of economists have warned negative RPI is a solid possibility.

Howard Archer, chief UK economist at Global Insight, warned retail price inflation will be negative next year.

"It does seem particularly likely that headline retail price inflation will go into negative territory in 2009 due to sharply lower interest rates," he said.

This is due to the cost of mortgage repayments forming part of the RPI figure. When interest rates drop, mortgage repayments drop and so does RPI.

Jonathan Loynes, chief European economist at Capital Economics, said: "RPI inflation could fall as far as minus two per cent.

"Not only is inflation in the UK still dead, but deflation is about to be reborn!"

George Johns at Barclays Capital expects RPI to fall to the lowest level since records began in 1948.

"For the RPI, we forecast a sharper decline from four per cent in 2008, to -0.3 per cent in 2009.

"Furthermore, we see RPI hitting a -1.3 per cent y/y trough in September."

• Tags:
• loans
,
• news
,
• student loan