Interest rate cap on postgraduate loans

The Government recently announced an interest rate cap on postgraduate loans. This will apply to students taking out a masters or PhD loan for tuition starting September 2022.

Student loan interest rates for current borrowers will be capped to protect them from a rise in inflation. The government has stepped in to ensure that in September 2022 borrowers face a maximum interest rate of 7.3% rather than 12%, after a rise in the rate of RPI.

This announcement had been anticipated because of the recent increase in the costs of living in the UK. The good news is that by capping the interest payable, students will repay less on their postgraduate loans when the time comes to pay them back.

Why has this happened?

The postgraduate loan scheme is offered to UK masters students. It is an efficient way of covering the tuition fees that students have to pay. The loan is worth up to £11,836 for a masters course and £27,892 for a PhD. The loan is due for repayment once you have finished your course. The amount you pay back depends on how much you are earning and the scheme you are on.

There are different student loan schemes depending on when you started your course and at what level (undergraduate or postgraduate).

Postgraduate loans become due for repayment once you start earning over £21,000 a year. Previously, the loan would attract an interest payment equal to the RPI (Retail Price Index) plus 3%, which meant the interest added to repayments (in 2021/22) was around 4.5%.

However, the sudden steep rise in the cost of living has increased the RPI. Students could have been facing an increase of up to 12%.

The government has stepped in to ensure that in September 2022 borrowers face a maximum interest rate of 7.3% rather than 12%, after a rise in the rate of RPI. This announcement is usually made in August. This year the change has been made earlier to reassure students that their loan will remain affordable.

Is this going to make a big change to the costs of my loan?

The change will not make a big difference for many students because the postgraduate loan is based on how much your salary is. If you are not working then you won't be paying anything towards your loan.

For those graduates who move straight into employment after their masters or PhD then the additional interest will only be felt by those on the highest salaries. At the moment only 23% of students in full time education repay their loans within 30 years of leaving university, after which time the debt is wiped.

Changes to the interest rate rise on postgraduate loans is not a long term problem. From 2023 the government is switching to a new system for calculating student loans. New students will pay off their loans over 40 years instead of 30.

The government will also lock the interest rate for repayments at the Retail Prices Index (RPI) rate of inflation. The salary you need to be earning under this new plan is set at £25,000 until the years 2025/26.