Prevailing rate fee loan interest cap triggered again

The standard interest rate charged on Plan 2 (post 2012 undergraduate) and Plan 3 (postgraduate) loans in England is the monthly Retail Price Index (RPI) plus three per cent.

For October 2021, RPI stood at an eye-watering 6 per cent, but the maximum interest rate that graduates will pay remains at 4.1 per cent due to the action of an interest rate cap . This was expected to revert to RPI+3 per cent (4.5 per cent) in January 2022 – instead, it was announced on Friday that interest will be held at 4.4 per cent until the end of February.

None of this is seen in the monthly repayments made by graduates (capped at 9 per cent for earnings above the threshold – currently £27,295), but interest rates do have an impact on the total amount repaid by graduates. This is a regressive measure – graduates who take longer to repay their loans pay more in total, and even a temporary increase in interest adds to this difference.

What is the interest rate cap and how does it work? Well, if the prevailing commercial rate for loans is lower than RPI plus 3 per cent, the amount of interest charged is reduced so graduates are not disadvantaged.

This all came about as a result of an amendment to the Teaching and Higher Education Act 1998 made by the Education Act 2011. Section 22 of the former, as amended states that:

the rates prescribed by regulations made in pursuance of subsection (3)(a) must be—
(i) lower than those prevailing on the market, or
(ii) no higher than those prevailing on the market, where the other terms on which such loans are provided are more favourable to borrowers than those prevailing on the market;

A rise in RPI coupled with low prevailing costs of borrowing helps forestall the pain of a hike in interest rates for graduates – but we need to keep an eye on this as borrowing in the wider economy becomes more expensive.