Students will now pay less money back on their loans, after the Bank of England slashed interest rates to their lowest rate ever.
The Bank cut rates to 1.5% last week, the lowest since its foundation in 1694, forcing the loans company to lower repayments. Recent graduates will now pay back their loans at 2.5% interest, half a percent less than a week ago.
Wadham undergraduate Rhian Petty said, “I never anticipated such a wonderful financial surprise.”
But news of the cut has been met with confusion by other Oxford students. Keble undergraduate Hannah Martin, said, “the interest cut is great, but some people aren’t aware that they are paying interest at all. There should be greater awareness of what we’re paying and how this will affect us.”
Oxford economics lecturer Christopher Bowdler said that the cut would benefit recent graduates most, as their loan repayments are reduced and they start to find themselves with a greater disposable income each month.
He said, “it’s rather like a reduction in mortgage rates. Authorities hope that by releasing this cash to [recent graduates] they will stimulate spending in the economic downturn.”
Martin Lewis, the ‘Money Saving Expert’ advises students not to worry too much about the exact rate of interest on their loan.
“There’s no ‘real’ cost because the highest you’ll pay is the rate of inflation,” he writes on his website. While graduates may be making savings now, “over the full term of borrowing, for most people, [the rate] should even itself out.”
The interest rate on student loans is influenced by two economic factors. The rate is either set at one percentage point above the Bank of England’s base rate or matched to the Retail Price Index measure of inflation. This calculates the increase in the cost of basic consumer goods each year and finds the average level of inflation from it.
The interest rate passed on to students is always whichever of these figures is lower, which until now has always been the Retail Price Index (RPI). The economic downturn has forced the Bank of England’s base rates below the RPI, creating the current drop in loan repayments for students.
The latest drop on the interest on student loans is the second since December, when the rate fell from 3.8% to 3%. It was previously set at 4.8%. The rules of the loans company insists that the interest on all student loans taken out from 1998 onwards is set at no more than one percentage point above the base rate.