Interest rate increases can be something that can be a worry for people who have borrowed money. Students and graduates may also worry about this as it means that the interest on their student loans will be higher. However, this is not something that all of them should worry about. This is due to the unique way that student loans work compared with other types of loans.
About student loans
Student loans are very different to other types of lending for a selection of reasons. This is because they are set up in a unique way. Firstly, not all students repay all of their loans. Only about a quarter of graduates actually repay the full amount. This is because they are written off after thirty years. The loans only have to be repaid once graduates are earning a certain amount of money. Therefore, those that start with low earnings, have breaks in their career or earn low throughout their careers will find that they will not be earning enough all of the time to have to make loan repayments. If they do not make all of their loan repayments then after the thirty years, they will have the remaining balance paid off for them. This includes any interest that has been added on to the loan and therefore most students will not even repay any of the interest that is due on their loans.
Interest Rate effects
Changes in the Bank of England base rate can sometimes be added on to student loans. This means that the interest rates can go up but they may also fall if rates go down. These rates will effect the amount of interest charged on the loan and therefore can go up and down. There will always be some interest charged on it but the amount can vary. Over the thirty years that the loan is held this could potentially fluctuate quite a lot.
Often when rates on student loans go up the media get all excited with articles saying how much more expensive student debt will be and what a burden it will be to graduates but it is worth keeping things in perspective. Firstly, rates go up to try to keep inflation down and therefore to stop prices rising. If the rates did not go up then prices could rise and so instead of the loan being dearer all other items could be instead and so all of your expenses may be rising in price very quickly so it could be dearer.
The most important point to remember though is that most graduates do not repay the full amount of their loan. This means that they will not be repaying the interest part of their loan. Therefore, any increases in interest will not have any impact on them at all.
Should you worry?
So, the only students and graduates that will be affected by interest rate increase are those that are higher earners. They are likely to be earning enough to make their repayments. However, if they have a break in employment then they may still not repay the full amount of their student loan. Whether you should worry about it will therefore depend on whether you think that you are likely to repay the loan in full. If you are going to have children and work part-time for a while then this could mean that you will not earn enough to repay the loan. If you go into a job which is not well paid then you will not have to make repayments. If you have any time when you are out of work then you will not be making repayments. It is hard to predict but you may have some idea as to whether you think you will be working continuously at a high salary for 30 years or whether you think you are unlikely to do so.
Even if you are working full-time and expect to repay your loan in full you should still not worry. The repayments are set up so that they are affordable. They are automatically taken through your tax code, so you do no even see the money or have to worry about the repayment as it happens automatically. This will mean that you do not have to even think about the repayments. You will also be a high wage earner if you are repaying the maximum loan amounts and so you should easily be able to afford the repayments anyway.
It is therefore best to totally ignore interest rates and any media reports about its effect on student loans. You should just get on with earning and let the repayments take care of themselves. You should feel relaxed that you will be able to afford the repayments as they are means tested and so even with an increase in interest you will be able to afford them.