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According to reports by the BBC and The Independent, students and graduates across the UK are going to face an eye-watering interest rate hike on their student debt that could reach as much as 6.3% in the autumn.
As of September, the interest rate on student debt is likely to go up from the already very high 6.1%, as a result of inflation over the past year. Angela Rayner, the Shadow Education Secretary, told The Independent that: ‘the latest rise in RPI means that hundreds of thousands of students will be seeing the unjustifiably high-interest rates on their student debt rise once again, to an eye-watering 6.3 percent. Students are graduating with over £50,000 in debt, and face these interest rates from the moment they begin their courses, causing their debt to skyrocket during their time at university when they cannot even begin to pay it back.”
Should you be worried about paying back student loan?
So long as you used a government student loan to go to university (rather than a personal or career development loan) then you don’t really have to worry about paying back your student debt. And you don’t really need to worry about the interest rate, either.
Jake Butler, an expert at Save the Student, said that another rise will add more to “the pot of student loan debt” and that these increases have a psychological, rather than monetary impact on students and graduates.
“Whilst the increase in interest is not as large as the jump we saw last year, it’s yet another increase on an already astronomical percentage. It’s important that students and graduates remember that this increase in the interest will likely just add even more to the pot of student loan debt that they’ll end up never paying back.”
Why are student debt headlines misleading?
Because those huge, scary numbers you hear about on the front pages of newspapers – the £70,000 Student Debt headlines – just are a little misleading. You do technically owe the government £70,000 for your education, but it doesn’t function like other loans do, it’s more like a tax.
So, as the interest rate on loans increases, the grand total you owe goes up. Your monthly payments will likely increase a bit, but on the whole, you won’t notice the difference too much. And, as you’re under no obligation to pay it back and the debt gets wiped out after 30 years, the chances are, you’ll probably won’t have to pay that interest off.
That’s why Jake Butler describes the effect as psychological. This increase will not have a monetary knock-on effect, but it could make you feel a bit down in the dumps if you see your student debt climbing up and up.
Is my student debt a proper debt? Should I consider a student loan consolidation to pay it off?
Unless you took out a high-interest personal loan to fund your degree (as some people did for post-graduate degrees before the recent reform), then there’s no need to consider a student loan consolidation to pay it off.
- The loan repayments on a £50,000 loan would be far more expensive than the amount you pay the government every month. The government repayment plan takes 9% of every £1000 you earn over the threshold. For instance, if you earn £22,000 after you leave university, you will pay £90 every year, which is less than £8 a month. A loan for the same amount could easily involve repayments of over 100 times that.
- Student loans (well, any student loan taken out since 1998) are repaid through your employer’s payroll, just like Income Tax or National Insurance. That means that – if you’re working – your employer will pay your student loan out of your salary before you get it and all of the money in your account is yours to spend and do as you please with. A consolidation loan would not work like this.
- This also means that there’s no chance that you’ll miss a payment and have debt collectors knocking at your door. Student loans just don’t work like that.
- Student loans don’t affect your credit score, they won’t affect your ability to get a house and they don’t show up on your credit file.
Will my student loan affect my ability to get a house?
The short answer? Nope. It won’t. In short, your student debt doesn’t affect your credit score, so it won’t affect your ability to get a mortgage.
The only way that a student debt could affect your mortgage application could affect your eligibility for a mortgage would be if it factors into the affordability calculations. However, at 9% of every £1000 over £21,000 a year, that’s quite unlikely. Not to mention, people with degrees tend to have higher salaries.
If you’re struggling with your student debt – or are looking at ways of trying to climb out of your ‘millennial debt’ – we recently wrote a blog post that covers a few quick and easy ways that you can end each month with more and more in your bank account. Why not check it out?
- Author The Bamboo Team
- Posted 23 July 2018