Student loan interest rates under 0%
The interest rate on student loans taken out before 1998 will be negative for the coming year.
Interest rates on student loans are set by the retail prices index (RPI) in March for the coming year from September. In March this year RPI was -0.4 per cent.
For loans from before 1998 the interest rate from September 2009 until 31 August 2010 will, therefore, be -0.4 per cent, the Student Loans Company revealed today.
This means the size of the debt will reduce - for one year at least - by 0.4 per cent.
The interest rate on student loans taken after 1998 will be zero per cent - as the government failed to honour the decision to match RPI.
The option to charge zero per cent - instead of -0.4 per cent - was made as legislation allows the secretary of state to charge no interest independent of what inflation is.
The rate on these loans will not be negative, the Student Loans Company stated, because "loans are already well subsidised, and it would be difficult to justify to taxpayers a situation whereby students take out loans in 2009/10 and their balances are immediately reduced".
The body also claimed if negative interest had occurred the repayment threshold would have fallen and borrowers would have started repaying earlier and ended up paying more.
"Setting interest at zero per cent has prevented this from happening," a spokesperson said.
However, the threshold for repayment of £15,000 has never before linked to RPI - leaving the reasoning behind this explanation flawed.
A Student Loans Company spokesperson explained it was the government's intention to raise the threshold in April 2010 by RPI following a review - but not this year. However, the Department for Innovation, Universities and Skills (DIUS) explained if a decision had been made it would have affected borrowers in theory immediately.
The move has been welcomed by the National Union of Students (NUS).
"We are pleased that the government has listened to NUS' concerns about how badly graduates are being affected by the current economic crisis," said NUS President Wes Streeting
"In the context of a recession, this is the best deal students and graduates could have expected. NUS will continue to monitor the rate of interest on student loans, and make sure the government is aware of students' concerns."
The issue of the negative RPI and student loans was first raised by myfinances.co.uk last year when economic forecasts pointed to deflation.
At the time the DIUS, which informs the Student Loan Company of the rates it can charge, seemed unsure about how to deal with a case where RPI is negative.
The interest rates on student loans made after 1998 have been falling in recent months, however, due to the cut in the base rate.
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.
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