Student Loan Interest Rates
Whenever you take out any sort of loan, it is very important to take into account the amount that you will pay back. Although a student loan from the government is a different type of loan, the principle still remains. You will be pleased to hear that the interest on debts from student loans is much lower than it is for most other types of loan. It is important to note that we are solely referring to UK student loans borrowed from the student loans company, not those borrowed from other places.
Although there are other types of student loan available, it is extremely unlikely that you will be able to get an interest rate as low as the one offered by the student loans company. Additionally, your eligibility for a normal loan is dictated by your credit rating. As the majority of people who enter into further education are under 21, it is very unlikely that they will have built up a good credit rating, or indeed any at all. This makes it difficult to get most types of loans.
Let’s look at some of the most recent interest rates on student loans: 2009/10 – 0%; 2010/11 – 1.5%; 2011/12 – 1.5%. These are all very low interest rates, especially compared to 2007/8 when the interest rate was 4.8%. It’s certainly fair to say that interest rates on debts from student loans are related to the state of the economy each year.
How are the interest rates calculated?
Interest rates are basically the cost to you of borrowing the money. The government tries to keep this as low as possible for student loans. The interest rates are calculated in one of two ways: either they add 1% to the current base rate set by the Bank of England, or they set it the same as the inflation rate (as measured by the RPI – which measures how much the price of retail good increases each year). The student loans company uses the lowest measure.
How is it related to the economy?
The Bank of England analyses the economy to decide what they will set their base rate at. They try to provide a base rate that will maintain monetary stability by minimising inflation and keeping the currency strong. In 2007/8 when the interest rate was relatively high, the economy was doing well. Hence, both the inflation rate and the Bank of England base rate were high, so the interest rate was high. In 2011/12, although the inflation rate was high, the base rate set by the Bank of England is low, therefore the interest rate is low.
Why this is important
Knowing the ‘cost of borrowing’ before you agree to anything is very important. This helps you to keep control of your finances at all times. Also bear in mind that these types of loans work off the principle of compound interest – the interest also earns interest. This means that even if the interest rate stays the same, you are paying more money each month. Next month’s interest = (Original amount borrowed + All previous interest)