Student loan 0% interest rate decision soon

A decision on interest rates on student loans is expected next week - with rates falling to zero per cent or even lower.

The interest rates on student loans are usually tied to inflation on the retail prices index (RPI) in March for the coming year.

RPI for March, in data released this week by the Office for National Statistics, was negative at -0.4 per cent.

The Department for Innovation, Universities and Skills (DUIS) has confirmed it is in discussions with the Treasury over what the rate from September should be - and a decision is expected soon.

A spokesperson for the Student Loans Company said: "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 September 1st 2009, so there is no need for an immediate decision."

Students and graduates are now expecting the rates on loans - which last year was at 4.8 per cent - to fall to at least zero per cent.

While some will be hoping the government will honour the RPI pledge and see their loans earn them money through decreasing in size.

The National Union of Students (NUS) has refused to comment on the topic until a formal decision is made, but admits it is in discussions with the DUIS.

For those with student loans for a course starting after September 1998, the rate has already been dropping.

The rates on these loans are based on the annual March RPI or the highest base rate of a number of major banks plus one per cent; whichever is lower.

With the Bank of England cutting interest rates to 0.5 per cent and street lenders following suit, the current student loan rate is 1.5 per cent.

In November, myfinances.co.uk reported on the prospects of negative inflation and the effect on student loan interest rates.

At that time, the DUIS stood by the decision to use RPI - but seemed unaware of the possibility of inflation falling below zero per cent, despite warnings from the Bank of England.