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Student loans giving money back (almost)

Around 390,000 graduates with outstanding student loans will see their interest rates turn negative this week in a move which will reduce debts over time even without repayments.

The UK’s current period of Retail Prices Index (RPI) deflation will see the interest rate payable on student loans taken out before 1998 drop to -0.4% - the first time the interest rate has turned negative since the Government-subsidised loan service was launched.

The Student Loans Company resets the interest rate payable every September 1, based on the level of RPI inflation in March of that year.

RPI turned negative for the first time in almost 50 years in March, going from zero to -0.4% as the recession hit the UK.

Pre-1998 students with debts still outstanding and who have not yet reached the salary threshold for repayment will see their loans reduced without having to pay anything back.

Consumer website MoneySavingExpert.com estimates that someone with £10,000 in outstanding debt will owe £9,960 at this point next year.

The Student Loans Company announced in May that negative interest rates would not apply to those who borrowed from them after 1998 – around 3.26 million people.

“While interest-free loans sound great, actually many students could rightly feel diddled,” said MoneySavingExpert.com founder Martin Lewis.

He added: “Everyone’s rate should be minus 0.4%, but the Government exploited a post-1998 loans technicality to prevent this.

“As the cost of goods are shrinking, your loan should too. It won’t; this means your spending power will be eroded.”

This was posted in Bdaily's Members' News section by Ruth Mitchell .