As deflation looms, could we face negative interest rates on student loans?

Last month the Retail Price Index (RPI) dropped to its lowest level in 49-years. This economic measure of the cost of living in the UK should be of particular interest to students and graduates who are carrying the burden of student debt.

Why and what does this mean for me?

Quite simply this should be of interest to you because the rate of interest calculated for student loans is directly linked to the rate of inflation, as measured by the RPI. This means, assuming that widely held predictions are correct and we see retail price growth fall into negative territory in the coming months, students could start looking forward to an interest rate that starts paying back their loan for them.

According to the Student Loan Company (SLC), students starting their course after September 1998 have an interest rate on their student loan which is ‘based on the annual March Retail Price Index (RPI) or the highest base rate of a number of major banks plus 1’; whichever is lower’. Pre-1998 students are slightly different, but can still benefit as they have a fixed term loan on which interest is charged based on the rate of RPI.

So assuming RPI falls to negative 1% in the March reading as projected, interest rates on student loans should also fall in line to 0% -1% for post 1998 students, assuming the Bank of England base Rate remains positive; also falling to -1% for pre-1998 students.*

To date, the government has stayed quiet on whether these savings would be passed on. It is clear that they would struggle financially to do so, but the political fallout from any hesitation or refusal could potentially spell electoral trouble.

Conservative Future will be keeping an eye on the figures as they come out and monitoring the SLC to ensure there is continued pressure to pass on the interest cuts on loans if they fall into negative territory.

* SLC have clarified this statement, interest is based on March RPI (not RPI +1%) as previously stated; or Base Rate +1%;

Related posts:

1. 50% of Students will not vote