The U.S. Department of Education has just announced that the student loan interest rates will be dropping, starting July 1st. This change means that undergraduate students who take out loans will be paying an average of .49% less on their loans next year. (The loans will be at a fixed rate of 4.29%.) Graduate students will be paying 1.5% less, or 5.84% on loans.
It’s that time of year again, and last Friday, the U.S. Department of Education announced the rates that student loan borrowers will be charged for loans disbursed starting on July 1, 2018. The rates are lower than last year’s, but that’s not saying much – they were already at historic lows, with the exception of the 8.5% rate on PLUS loans for graduate students. (That rate remains unchanged for new loans disbursed next year.)
Interest rates on student loans will begin to fall in September. But how does this affect you and your credit? In the following, we’ll explain everything…
The interest on your student loans almost piles up from the moment you get them, so the drop in interest rates – at least for some students – is pretty good news. We’ll talk about it in detail here.
But first, a brief word on how interest rates are moving. They are changed each year in September and are based in part on changes in the RPI (retail price index) in March of the same year. And today it was announced that the RPI for March 2021 will be 1.5%, up from 2.6% last year.
For students in England and Wales (where the interest rate on student loans is equal to the RPI + 3%), this change to the RPI means that the interest rate will fall to 4.5% in September 2021. For students in Scotland and Northern Ireland, interest rates on student loans are unlikely to change, but there are other factors which we will discuss below.
Based on data from the student loan system, we are confident of these figures, but note that the Government will not officially confirm the interest rates until later in the year.
What is your plan for student loans?
Although INPI affects the calculation of interest on your student loan, most of the information about how much interest you have to pay depends on when you went to university and which part of the UK you are from.
Use this table to find out which regime you belong to:
Change in interest rates for student loans
Here’s what you can expect from student loan interest rates in 2021:
You have student loans under Plan 2
The interest on your student loan starts to accrue while you are still studying at university () and for English and Welsh students the interest rate on the loan is set at RPI + 3%. This rate is currently 5.6% (with an RPI of 2.6% in March 2020), but will fall to 4.5% in September.
If you z. B. you are still studying, then you have to pay 4.5% interest on the loan while you are studying.
After graduation, the interest rate increases to a maximum of RPI + 3%.
Graduates earning less than £27,295
If you graduate and earn less than the repayment threshold of £27,295 per year, you will have to pay interest at the RPI rate.
At this point, it’s important to note that you won’t start paying back your student loan until April after you graduate, and even then, only if you earn more than £27,295 a year.
Furthermore, unless you start with a graduate salary of around £30,000 or more (it is estimated that only 17% will achieve this), it is unlikely that you will be able to repay the loan and interest in full before the loan is paid off in 30 years.
Graduates earning more than £27,295
Once you start earning more than the repayment threshold, you will have to pay interest at the RPI rate + up to 3%.
Anyone earning more than £49,130 must pay the full RPI rate + 3%. Graduates with salaries between these two figures will receive a sliding scale of RPI to RPI + 3% interest.
As mentioned above, the RPI + 3% is currently 5.6%, but it will fall to 4.5% in September. This means that the maximum rate charged to a graduate is 4.5% and those earning between £27,295 and £49,130 will be charged between 1.5% (RPI) and 4.5% depending on their salary.
Find out when (and if) you’ll be able to pay off your loan in full with our student loan repayment calculator:
You have student loans under Plan 1 or Plan 4
For students in Northern Ireland and all English and Welsh students admitted to the University between 1998 and 2011, student loan interest rates apply under what is known as the Plan 1 repayment system (as opposed to Plan 2, under which English and Welsh student loans are currently repaid).
And from the sixth grade. In April 2021 (the start of the new financial year) Scottish students will move from Plan 1 to the Plan 4 refund system.
If you have a plan 1 or plan 4, the interest rate on your loan is currently just 1.1% and, unlike students in England and Wales, it’s likely to remain unchanged in September – but there’s no way of telling for sure at this stage.
In fact, your interest rate is set based on the lowest value: RPI or Bank of England base rate + 1%. As the Bank of England base rate is currently 0.1%, it is unlikely that a change in the RPI will affect the repayment of your student loan.
But the current economic climate is very uncertain. The Bank of England’s base rate changed twice in March 2020 in response to the Corona virus outbreak. Therefore, we cannot say with certainty that it will not change again before September 2021.
Remember, you will not start repaying your loan until you have earned more than £19,895 if you have chosen plan 1, or more than £25,000 if you have chosen plan 4.
Should we be worried about student loan interest rates?
There are clear benefits to lowering interest rates on student loans.
For example, if you plan to pursue a high-income career, chances are you will pay off the entire loan early – in which case : The lower the interest rate, the less you have to repay in total.
But as we said, the IFS estimates that 83% of students who get a Plan 2 loan will never fully repay their loan before the debt is paid off. Since you are unlikely to repay the loan in full before the end of the term, the interest accrued should have little impact on your overall repayment.
If you can’t repay the loan, it doesn’t matter if the interest rate is 4.5%, 45% or 45,000,000%, it will mature after about 30 years, no matter how much you repay.
More needs to be done to support students
Lower interest rates are a small improvement, but for most students this change will have more of a psychological effect than a financial one.
It may relieve the stress of knowing you’re paying less interest on your loan, but we want the government to do much more to make a real difference to your financial situation.
We want the government to make more substantial changes in response to the pandemic, such as increased support and wider alimony loans or grants that will help most students financially now – not small changes that will only help a small proportion of high earners in the future. That’s not good enough.
Here’s how our student money expert Jake Butler reacted to the news:
Many will see this drop in interest rates on student and graduate loans as a win for students, but don’t be distracted by the fact that these interest rates are still much higher than they should be.
This change will do little to reassure students after a year in which they seemed to have been forgotten, and seems to highlight for the millionth time the dysfunction of the student loan system.
However, this change will make little difference to how most graduates will repay their loans, as they will be systematically forgiven.
Graduates only pay a percentage of what they earn above a certain threshold, and the remaining debt is paid off after 30 years, so small fluctuations in interest rates only add or take away a lot of money that will never be paid back anyway.
While this measure will have a positive psychological effect, it will have little monetary effect.
If you want to learn more about how student loan repayment works, our handy guide answers your basic questions.
This source has been very much helpful in doing our research. Read more about student loan forbearance extension 2021 and let us know what you think.
Frequently Asked Questions
Are student loans affected by the stimulus package?
The American Recovery and Reinvestment Act of 2009 included a provision for Income-Based Repayment of federal student loans, which would allow eligible individuals to pay 10 percent of their income to the government, instead of the regular 15 to 20 percent. President Obama’s proposed American Jobs Act would extend Income-Based Repayment for another two years, but it is not currently in effect, so any changes would not affect students who receive their loans before 2011.
At the start of the year, the American Recovery and Reinvestment Act of 2009 (ARRA) was passed to help stimulate and support the economy. One of the main parts of the ARRA is to give college loans to college students around the country to improve the economy. However, with the new stimulus package, the ARRA will be extended into 2021. This means that college students will no longer have to worry about the government cutting off their college loans or for the government to change the interest rate.
Can I get my student loan interest rate lowered?
If your federal student loan interest rate is for the 2015-2016 school year, there’s a chance you could pay less interest than you did the past year. If you’re a new borrower as of Oct. 1, 2013, and your loan was disbursed on or after Oct. 1, 2013, your interest rate could have been set as low as 5% or as high as 9.5%. But if you don’t want your interest rate to increase at the end of the year, you usually have to consolidate your loans into the federal student loan program, or make 20 on-time, consecutive monthly payments.
Many students graduating from college are looking for ways to get their student loan interest rates lowered. While there are no guarantees, there are ways to get your rate lowered. Call your credit card companies and ask them to lower your interest rate. I had some credit card companies lower my interest rate to zero percent. There are also a lot of companies that specialize in lowering your interest rates.
Will student loan refinance rates go down?
In late 2018, the student loan refinancing market collapsed, leading to a year of economic upheaval. As a result, millions of Americans no longer had access to the affordable student loan refinancing that they had previously enjoyed. In the years since, the refinancing market has continued to shrink, and now only the most creditworthy borrowers have access to the lower rates that student loan refinancing used to provide. So, what will happen to student loan refinancing rates in the future? Will they rise or fall? The U.S.
Department of Education recently announced that it would not be extending the student loan forbearance period through 2017, as it had done in previous years in order to allow more time for students who were in the process of enrolling in income-driven repayment plans to be able to qualify for the lower interest rates that were being offered as part of those plans. But the department did say that it was listening to feedback from consumer advocates, and that it was continuing to explore ways of helping students who are struggling to afford their payments.