Deflation means that students may be given rebates on student loans unless interest rate calculations are changed.
Interest on student loans is calculated with reference to the Retail Prices Index (RPI), which in March showed inflation to have dropped to -0.4%. It is the first time Britain has experienced deflation since 1960.
Interest is calculated in March but applied in September, meaning that current economic changes would not impact on loans until later this year.
The fall in inflation effectively means that students would start to earn interest on their loans, rather than pay it, and could result in rebates for some graduates.
However, this will only be the case if the way that interest is calculated is not changed.
A spokeswoman for the Department for Innovation, Universities and Skills, which is in charge of policy making for the Student Loans Company, said that they are in discussions with the Treasury and will ‘consider the options available’.
She added that the department hopes to ‘make an announcement shortly’.
The DIUS has indicated that the situation will have been clarified well in advance of the annual change to interest rates in September.
Interest on ‘mortgage-style’ fixed rate loans taken out before 1998 must track RPI rates, even if they go into deflation. Post-1998 rates, in contrast, are based on the annual March RPI or the highest bank base rate, whichever is the smaller, plus 1%.
The Student Loans Company has also recently announced a new loan recovery system for outstanding loans.
In a news release on its website, the company said that it will be contacting graduates who have consistently defaulted on loan payments. It threatened that those whose salary exceeds the maximum for deferment will be registered with UK Credit Reference Agencies. The changes only apply to those on post-1998 loans which are tied to RPI.
The company emphasised that options are available for those who need to defer or work out a new repayment plan.
Before the fall into deflation last month, students had been paying the highest rate of interest on loans since the early nineties, at 4.8% throughout 2007/08. The SLC has said that interest in 2009/10 will not exceed this year’s rate of 3.8%.