Money mensch: Good news for holders of student loans

By Martin Lewis, March 5, 2009

If you or your kids have a student loan taken out since 1998, congratulations — it’s unexpectedly got a lot cheaper in recent months.

Normally, the student loan interest rate changes annually, at the start of the academic year, and is set at the rate of inflation for the prior March.

Last September, it dropped from 4.8 per cent to 3.8 per cent. A small saving, but still in the current climate, quite a hefty rate.

Yet in December, for the first time ever, a tiny clause in all student loans taken out since 1998 came into play. It says: “If the average of 11 major banks’ base rates, plus 1 per cent, is lower than the current student loan rate, the interest rate will drop to that.” And the mammoth amounts that have been sliced off the recent Bank of England base rate means this is exactly what happens, and it keeps falling. After the cut in the beginning of February, the student loan interest rate dropped again — to 2 per cent. As each successive rate cut happens, within a few days the student loan rate is likely to drop, saving students some real cash.

The real question comes next year, though. Remember that student loans have always been based on the rate of inflation in March, and for this March, deflation is predicted; in other words, negative inflation. This means we should see student loans actually shrink from next September. But this is as yet unconfirmed. The government may change its mind, as other payments like benefits and pensions also depend on inflation, and to see those shrink too would cause political crisis.

    Last updated: 4:46pm, March 5 2009