Millions of students and graduates will see interest on their loans drop to zero or lower today following falls in the retail price index.

Whilst the majority of students - those who took out loans after 1998 - will see the interest on their student loans drop to 0%, graduates who commenced study before 1998 will have their new interest rate set at -0.4%, meaning that the amount they owe will have decreased by the end of the 2009/10 academic year, even if they make no repayments.

The interest rate for student loans taken out after 1998 is based on the retail price index, which turned negative for the first time in almost 50 years in March at -0.4%, as the UK’s recession worsened. However, a legal loophole has enabled the government to refrain from setting an interest rate at all on these “income contingent” loans, in effect making the rate 0%.

A spokeswoman for the Student Loans Company said: “The decision has been taken 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. This will affect those who have an outstanding student loan taken out after September 1998, as well as applicants for both maintenance loans and tuition fee loans in the current and next academic year.”

However, some 390,000 graduates still paying off pre-1998 loans, which operate through a fixed-term mortgage-style scheme, will benefit from an interest rate of -0.4%.

The two schemes operate differently when it comes to repayments. Whereas the repayment threshold for loans taken out in 1998 or later is set at £15,000, with graduates repaying 9% of what they earn above this figure, students who took out loans before 1998 do not have to start repayments until they are earning £25,936.

This entry was posted on Tuesday, September 1st, 2009 at 11:43 am and is filed under Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.