In what is being described as a ‘rollercoaster ride’ by the Institute for Fiscal Studies (IFS), graduates will see interest rates on loans fluctuate dramatically over the coming years.

Student loan interest rates are expected to skyrocket from 4.5 per cent to 12 per cent for high earners and from 1.5 per cent to 9 per cent for low earners from September. 

In real terms, this means that an average graduate with £50,000 of student loan debt will incur £2,200 to £3,000 in interest over six months -  more than someone earning three times the median salary for recent graduates would usually repay during that time. 

Five ways to save money on your weekly food shop amid cost of living crisis

Student loan interest

The maximum student loan interest rate is then likely to fall to around seven per cent in March 2023 and fluctuate between seven and nine per cent for a year and a half; in September 2024, it is then predicted to fall to around zero per cent before rising again to around 5 per cent in March 2025.

The IFS says that 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. 

While interest rates affect all borrowers’ loan balances, they only affect actual repayments for the typically high-earning graduates that will expect to pay off their loans.

Why is the student loan interest rate allowed to fluctuate like this? 

Depending on a graduate’s earnings, the interest rate charged is between the rate of Retail Prices Index (RPI) and the rate of RPI inflation plus 3 per cent.

Today’s RPI inflation rate from the Office for National Statistics measures RPI inflation between March 2021 and March 2022, which will be relevant for student loan interest rates in the 2022/23 academic year. 

Reflecting the huge increase in the cost of living over the past year, today’s RPI inflation rate of nine per cent is much higher than last year’s reading of 1.5 per cent.