Student Debt: UK Records Highest Ever £4.8bn in Annual Interest

United Kingdom Europe Higher Education News by Erudera News May 08, 2023

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The UK government has increased its revenue from the interest charged on student loans, official figures have shown.

According to a report by The Guardian, this increase has left graduates to suffer borrowing costs nearly twice the rate set by the Bank of England.

Based on the most recent figures on public finances from the Office for National Statistics (ONS), the total accrued interest on student loans surged to £4.8bn in the 12 months ending in March. That was a significant increase from the previous year’s amount of £2.3bn and the highest amount recorded during the year.

The UK Department for Education set a maximum interest rate of 6.3 percent on student loans last fall, but it has jumped to 6.9 percent since then, and it is going up again to 7.3 percent. The 7.3 increase is expected to take place in June this year, reports.

According to the government, the increase is necessary to keep up with the rates offered by high street banks on unsecured personal loans.

Projections say that students who started their education in the 2021/22 academic year can expect the average debt to be nearly £46,000 when they finish the course. It is further predicted that only about 20 percent of full-time undergraduates who started their courses in 2021/22 may have to repay the full loans.

Every year, almost £20bn is loaned to around 1.5 million students in England, the newspaper reports. Currently, the value of outstanding loans is over £180bn.

Although the student loan interest rates stood at 4.5 percent a year ago, the government has increased the limit on rates, and it is nearly twice the Bank of England’s base rate of 4.25 percent.

The most affected by the large increase in interest rates were students who started their university courses before 2012. The rate rose from 1.5 percent to five percent in the past year. For these students, the interest rate charged is either the RPI inflation rate or the Bank rate + one percent, whichever is lower.

These changes have provoked reactions, with critics saying that students are now in financial distress due to the enormous debt after graduation, and such a situation is widening the financial gap between the generations and low-income students and wealthier families.

Ben Waltmann, an economist at the Institute for Fiscal Studies, described the current limit set by the government on loans after 2012 as too high. He called on the ministers to set stable and lower interest rates.

“Interest rates that are higher than the government’s cost of borrowing can discourage some prospective students from going to university, even when that would be the best choice for them and for society,” he told The Guardian.

Last year, the Education Department increased the interest rate for pre-2012 student loans to 3.2 percent.

>> UK Government Confirms It Will Freeze Tuition Fees at £9,250 for Next Two Years

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