What will be the impact of rising interest rates on student loans?

The Bank of England announced its biggest interest rate hike in 27 years as the UK battles runaway inflation, sparking fears among consumers about the consequences of a worsening fuel cost crisis. life and the prospect of an impending recession.

The central bank’s nine-member monetary policy committee had already raised interest rates five times this year, overseeing a rise from 0.1% in December 2021 to 1.25% in June, before raising interest rates. go even further on Thursday and raise it to 1.75%.

An attempt to rein in runaway inflation – already at a 40-year high of 9.4% and set to swell further – the move marks the first 50 basis point hike since 1995 and pushes the cost of borrowing to its highest level since December 2008 during the global financial crisis.

While the move will impact all manner of personal finance products, from mortgages to savings accounts, credit card debt, pensions and auto loans, one area that will be immune of its immediate impact is that of student loans.

Indeed, the British government decided in June to cap the interest rate on repayments at 7.3%, intervening to prevent an increase from 4.5% to 12%, which had been forecast by the Institute for Fiscal Studies for implementation by September 2022.

Announcing the decision earlier this summer, then Higher Education Minister Michelle Donelan said it was aimed at bringing “peace of mind” to graduates worried about bleak economic prospects.

“I will always strive for a fair deal for students, which is why we have reduced the interest rate on student loans from the expected 12%,” she said.

“I want to reassure that this does not change the monthly repayment amount for borrowers, and we have brought this announcement forward to provide more clarity and peace of mind for graduates at this time.

“For those starting graduate school in September 2023 and all students considering this next step at the moment, we have reduced future interest rates so that no new graduate will ever have to pay back more than what he borrowed in real terms.”

After taking that step, Ms Donelan was promoted to education secretary by Boris Johnson last month in a frantic reshuffle meant to stabilize a ship rocked by the wave of mass resignations in protest at the Prime Minister’s outrageous leadership, to resign 36 hours, making her the shortest-lived Cabinet member in Westminster history. She was quickly replaced by James Cleverly.

While the decision to cap this interest rate for students – calculated by adding 3% to the inflation measure of the retail price index – was widely welcomed, Larissa Kennedy, President of the National Union of students, protested that it was “still cruelly high”. .

“While some graduates might breathe a sigh of relief that the interest rate is no longer in double digits, ministers should prioritize providing urgent cost-of-living support here and now,” a- she declared.

She said the government “should introduce rent protections, offer basic levels of maintenance support and announce a cost of living payment for all students”.

As Ms Kennedy suggests, the Department for Education’s decision does not protect students from the wider consequences of inflation, such as the rising price of consumer goods in supermarkets and on the high street.

But Bloomberg, for its part, managed to put a positive spin on the situation, arguing that the interest rate hike could ultimately benefit students on the basis that, if it succeeds in lowering inflation like the hears from the Bank of England, student loan rates will also eventually fall.

Full details on student loan repayment for graduate and postgraduate students can be found on the government website.

About Judith J. George

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