Interest rates on student loans 'likely to increase'

Students and graduates face higher interest rates on student loans as inflation continues to rise.

Around three million students and graduates are likely to see the cost of their loans increase in September.

The Student Loans Company resets the interest rate payable at the start of September, and bases it on the level of Retail Prices Index (RPI) inflation rate in March, at which point RPI had risen to 4.4% in March, which is due to cause an increase from the current zero rate for some graduates.

The Interest rates applied to student loans differ depending on when they were taken out.

Those that took a loan out before 1998 are expected to see interest rates set to the level of RPI in March.

This group of graduates are currently paying minus 0.4% interest after RPI turned negative in March 2009 for the first time in 50 years, but this is expected to change from September.

Those that took out student loans after 1998 are likely to see interest set at either the Bank of England Bank rate (currently 0.5%) plus 1% or the RPI in March, depending on which of the two is lower.

This will mean an end to the current zero rate being charged. The Student Loan Company previously ruled that negative interest rates did not apply to student loans.

The changes have yet to be confirmed, as the rates need to be formally set by the government.

The student loans system suffered serious problems last year, leaving many students without funding, after the SLC took over from local authorities, processing all England's student applications for grants and loans for the academic year 2009-10.

Written by Sam Gooch