Impact of BoE rate hike on student loans

08 Aug 2022

Following the Bank of England unveiling its largest rate hike in 27 years last week in a bid to curtail soaring inflation, consumer fears are heightened over the likelihood of a recession.  The central bank increased interest rates to 1.75% last Thursday, and even though the move will have knock-on effects for all types of personal finance products, one that is protected from the immediate impact is student loans.  

Why are student loans protected? 
The main reason is because the government capped the interest rate on repayments at 7.3% back in June. They intervened to stop an increase from 4.5% to 12%, which according to the Institute for Fiscal Studies was due to be implemented next month, The Independent reports. Former higher education minister Michelle Donelan said earlier in the summer that the decision aimed to bring grads “peace of mind” to those concerned about the gloomy economic outlook. “I will always strive for a fair deal for students, which is why we have reduced the interest rate on student loans down from an expected 12%,” she said. “I want to provide reassurance that this does not change the monthly repayment amount for borrowers, and we have brought forward this announcement to provide greater clarity and peace of mind for graduates at this time.” She added: “For those starting higher education in September 2023 and any students considering that next step at the moment, we have cut future interest rates so that no new graduate will ever again have to pay back more than they have borrowed in real terms.” 

Was the student loan interest rate cap welcomed? 
Although the move to cap the rate was met broadly favourably, president of the National Union of Students, Larissa Kennedy said it remained “cruelly high.” She added: “While some graduates might breathe a sigh of relief that the interest rate is no longer in double figures, ministers should be prioritising providing urgent cost of living support here and now.” Kennedy continued that the government “should introduce rent protections, offer basic levels of maintenance support and announce a cost-of-living payment for all students.” The Department of Education’s decision doesn’t protect students from the broader impact of inflation, such as the increased cost of consumer goods on the high street and in supermarkets. For complete details on student loan repayments for grads and post-grads, check out the government’s website.