Are UK Student Loans Interest-Free?
Student loans can rack up to quite a hefty sum. So, wouldn’t it be ideal if no additional interest was added to this amount? We hate to be the bearer of bad news but sadly, UK student loans are not interest-free.
In fact, these loans begin to accumulate interest from the day you withdraw them. After you’ve finished university, your student loan will continue gathering interest until you no longer need to repay it.
Ok ok, it might sound scary. But it isn’t, we promise. Let’s break it down:
Why Is Interest Charged On Student Loans?
The Student Loans Company (SLC) lends to students on the condition that interest will be paid on what they’ve borrowed. In fact, this is like almost every other type of loan. In the world of borrowing, interest-free loans are like gold dust.
The interest rate is set at the start of each academic year and is linked to the rate of inflation. This is measured by the Retail Price Index (RPI).
Now, this may sound unfair. But, actually, it just means the amount you owe increases by as much as the price of things in general. As a result, this ensures the SLC is repaid the same value of money as they initially lent.
How Much Interest Will Be Charged On Student Loans?
The amount of interest you owe will depend on what type of repayment plan you are on. Students will be on different repayment plans depending on their course and the year it began.
As of 2023, the interest charged on these plans is currently:
- Plan 1 - 5.25%
- Plan 2 - 7.1%
- Plan 4 - 5.25%
- Postgraduate Loan - 7.1%
If you begin your course on or after 1 August 2023, you will be on Plan 5. The interest rate on this plan will be based on the current RPI.
To check which student loan repayment plan you’re on, just log onto the government or SLC website. This can give you all sorts of handy information on the details of your student loan.
Can Student Loan Interest Rates Be Capped?
But if the cost of living keeps going up, does that mean interest will too? WILL IT EVER END!?
Don’t worry. The Department for Education ensures interest rates on student loans never become too high. Phew! They do this by monitoring interest rates set by commercial banks.
If the average commercial interest rate is lower than what you’re being charged, a temporary cap is applied. This will stop anyone from being disadvantaged. This will then be reviewed after 3 months, and the cap will be changed if necessary.
As of 2023, the current interest rate is capped at 7.1%. This means that anyone on Plan 2 doesn’t need to worry about their interest rates increasing any further.
Conclusion
So, listen up graduates, you must be aware that student loans are not interest-free! As time goes on, these loans will accrue interest.
The best thing to do would be to keep an eye on the SLC website. This will give you a clear understanding of the interest rates being applied to your student loan repayments.
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