A Level results day is here and students across the nation will be packing their bags for uni and crossing the ts and dotting the is on their Student Finance England applications for student loans.
But Money Saving Expert Martin Lewis has delivered a ‘jaw dropping’ revelation about student loans and how they really work.
In a significant move, the Student Loans Company has declared an increase in the interest rate on student loans to a hefty 7.9 percent.
This hike, up from the previous rate in May, will affect everyone with Plan 2, Plan 5, and Postgraduate loans.
Plan 2 is for students who began their studies from September 2012 onwards, while Plan 5 caters to those starting courses after August 2023.
The Student Loans Company explained: “The Department for Education (DfE) and the Welsh Government has today confirmed a change to the maximum Plan 2, Plan 5 and PG loan interest rate which will be 7.9% in June 2024.
“The applicable rate of RPI to student loans from 1 September 2023 to 31 August 2024 is 13.5%. This means that the maximum interest rate applicable to Plan 2 loans and the interest rate for PG loans is 16.5%, and the interest rate applicable to Plan 5 loans is 13.5%. However, as the comparable prevailing market rate (PMR) is lower than this, an interest rate cap of 7.9% will be applied to all Plan 2, Plan 5 and PG student loans in June 2024.”
Martin Lewis, the financial guru behind MoneySavingExpert.com, has delivered some potentially shocking advice for those burdened with student loans.
He said: “The jaw dropping fact is the only people who should be overpaying their student loan debt are high earners, free of other debts, who’ll never want a mortgage or other loan.”
Explaining the often misunderstood nature of student debt, he added: “This will seem odd to some. After all, if you started university in 2013, having taken full tuition fees and maintenance loans each year, that’s a total loan of £44,000 and likely an already scary £5,000+ interest has been added to your statement.”
Lewis also highlighted a crucial difference between student loans and other types of borrowing: “Student loan statements can lie, as unlike other debt, the interest added ISN’T the interest paid. That depends on future earnings. Some won’t repay any interest and most won’t earn enough to repay close to all of it.”
Previously, Martin has suggested rethinking the way we view student loans, advising to consider them more like a tax than a traditional loan. He has pointed out that since many people will never fully repay their student loans before they are forgiven after 25 years, the actual amount of debt listed is less important than it seems.
For the majority, the looming figure of debt is not as critical, because the government will eventually write it off.
Plan 2 student loans are automatically wiped by the government 30 years after you commenced your course, irrespective of the remaining debt. Hence, overpaying doesn’t save you anything if you aren’t going to clear it anyway.
For Plan 1, it’s 25 years.
