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Student Loan Interest Rates To Fall

Happiness

*Update 27/4/09* Due to the rapidly changing economic climate, this post is a little outdated. I recommend reading my latest post on the ‘current situation’

A bit of positive news after last years shocking interest rate rise. Student loans may see the rate fall from currently 4.8% to 3.8%. Although not confirmed yet, it looks like it will fall. This is most likely to change in September.

But how is the rate calculated? Well the Government’s aim is to set the rate so it mirrors the rate of inflation. Therefore the money you borrow remains the same value. Or at least that’s the plan. The problem, how do you calculate the rate of inflation? The two current methods are Retail Price Index (RPI) and Consumer Price Index (CPI). Before 2003 the Government’s rate of inflation was set by the RPI method, without going into the finer detail this gave the higher rate of interest. But since 2003, The Government has been using CPI as the indicator for rate of inflation. Yet they are still using RPI still to calculate student loan interest. The difference is disgusting.

What’s worse RPI tends to fluctuate more. For the year 06/07 the rate was 2.4% but this year it is 4.8%. Yep doubled.

What makes it even more unfair is how it is based on the rate of inflation for March only and not an average for the year. Last year, March was abnormally high compared to the rest of the year, as you can see from the graph below. What is probably more disturbing is the current trend of rising inflation, I think the graph speaks for it’s self. On the back of the ‘credit crunch’, 2009/2010 may see a new record for student loan interest…

Inflation rate CPI & RPI
Source: National Statistics website: www.statistics.gov.uk
Crown copyright material is reproduced with the permission of the Controller Office of Public Sector Information (OPSI)

Just have to wait and see what the future holds.

Martyn

Update (6/9/08): The rate has been cofirmed as 3.8% for 2008/09.

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