English and Welsh graduates who took out a student loan since 2012 are in for a rollercoaster ride on student loan interest rates in the coming years according to the Institute for Fiscal studies.

Their analysis found that the latest RPI inflation means that the maximum interest rate, which is charged to current students and graduates earning more than £49,130, will rise from its current level of 4.5% to an eye-watering 12% for half a year unless policy changes (the interest rates for low earners will rise from 1.5% to 9%).

This means that with a typical loan balance of around £50,000, a high-earning recent graduate would incur around £3,000 in interest over six months – more than even someone earning three times the median salary for recent graduates would usually repay during that time.

The maximum student loan interest rate is then likely to fall to around 7% in March 2023 and fluctuate between 7 and 9% for a year and a half; in September 2024, it is then predicted to fall to around 0% before rising again to around 5% in March 2025. These wild swings in interest rates will arise from the combination of high inflation and an interest rate cap that takes half a year to come into operation.

Without the cap, maximum interest rates would be 12% throughout the 2022/23 academic year and around 13% in 2023/24. While interest rates affect all borrowers’ loan balances, they only affect actual repayments for the typically high-earning graduates that will pay off their loans.

This interest rate rollercoaster will cause problems. The way the interest rate cap currently operates disadvantages borrowers with falling debt balances for no good reason. Perhaps more importantly, sky-high interest rates may put some prospective students off going to university; some graduates will likely feel compelled to pay off their loans even when this has no benefit for them.

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