Should I Worry About Increases in Interest Rate on my Student Loan?

Student loans can be a source of stress for many students and graduates. When their statement comes it can be source of horror when they see how much they owe and when news of interest rates increasing comes out then this can further this stress. However, it is very wise to ask yourself whether you should worry about what you owe and what the interest rates are.

  • What difference will interest rates make? – it is worth understanding more about how student loans work and whether the interest rate changes and in fact the statements should be a source of worry to you. The loans work very differently to other sorts of loans and it has in fact been argued, that they should not even be called loans because of the way they work. A graduate will not have to make any repayments until the April after they have left university. They then have a period of 30 years where they may have to make repayments after which any remaining loan will be written off. This means they potentially not repay any of the loan, although most graduates will repay some and very few will repay all of what they owe. The repayments are calculated based on what the graduate can afford and are taken out of their salary using a special tax code. This means that until they are earning over a certain amount of money, they will not be asked to repay anything. Then there is a increasing scale, where repayments will increase as salary increases up to a maximum cap. This means that graduates who are out of work or on a low salary will not have to make any repayments at all, those on a reasonable salary will start to make repayments and those on high salaries will repay the maximum each month. The amount paid is adjusted depending on pay so even if you are paying the maximum at one stage, if you are then out of work you will not have to repay any until you are earning above the threshold again. What this means is that you should always be able to afford the repayments.

Interest rates are charged on the outstanding balance and so if you are paying off a lot, then there will less outstanding to pay interest on. If you are not are paying any then there will more outstanding to pay interest on and therefore those with more money outstanding will be charged more interest. However, the interest is added on to what is owed, rather than charged to the graduate. This means that if they do not manage to repay the full amount, which is what happens with three quarters of graduates, they will never repay any interest.

  • Will I even pay interest?
    So whether you pay interest will very much depend on how much you earn. You will have to be earning a lot of money consistently for thirty years in order that you will repay all of the interest. Whether you do this will depend on a lot of factors. The career that you go into may be one that is highly paid and therefore your starting salary could be already on the threshold for repaying the loan and if this continues then you maty repay some or all of the interest. However, if your salary starts low and climbs slowly then you may not pay any interest. This may also be the case if you take some time out of work. This might be to travel, have a family, look after older family members or because you are out of work. If you are not working and therefore not earning, you will not have to make repayments for this period. So, whether you personally pay interest will depend on how your career pans out, but looking at the current figures, odds are that you will not have to pay any interest.
  • Will I end up repaying more each month if rates go up?
    It can be a worry that when we see the stories about rates going up, that we will have to start paying more back each month on the loans. It is worth understanding how the rates work before you start to worry.

Firstly, the interest rate is determined by your earnings. If you earn below the threshold they are set at the RPI, which is the Retail Price Index and so any rise in rates announced by the government will have impact at all. Once you are earning at a higher rate then the interest rate is the RPI and a percentage and in between the two figures you are charged somewhere in between the two – it is set on a sliding scale, rising slowly as salary rises. The actual percentage the thresholds do change so you will need to check these. The first thing to realise is that an RPI increase should not cost you anything extra because your salary should go up by this much as well.
The interest going up should also not really concern you for another reason. It will not change how much you repay. The amount you repay is 9% of what you earn once you earn above a certain threshold which is the same threshold as when you will start being charged interest on the loan. So, as it is a percentage of what you earn, then the interest charged will make no difference at all to what you are repaying each month.

  • Will I even pay any interest at all?
    This will very much depend on whether you manage to earn enough to make significant repayments on the loan. You will need to consistently earn a large salary in order to make large enough repayments to clear your loan and the interest. So, if you take time out of work, are on a low salary or borrow a lot then you are less likely to repay it. If you borrow less money, perhaps only for fees rather than fees and loving expenses, perhaps if you stay at home, then you are more likely to have to pay the interest as it will be easier for you to be able to afford to repay all of the loan before the thirty years are up.

Does my Overdraft have too high an Interest Rate?

If you have a current account with a bank or building society then it is a likely that you will have an overdraft facility along with it. Overdrafts can often seem to have quite a high interest rate and you may worry that perhaps the one that you have is too high. It is useful to check this, but you need to be aware of other factors that might also affect the cost of your overdraft.

Authorised and unauthorised overdrafts

There are different types of overdraft and it is important to understand the difference if you are going to be comparing rates. An authorised overdraft is one that you have arranged with your bank or building society. They will give you a credit limit at an agreed rate. This means that anything you borrow from them will be charged interest at that rate.

An unauthorised overdraft is where you go beyond your overdraft limit or borrow money when you have not been offered an overdraft at all. These have different rates. These are usually much higher rates and so you will be charged more than you would be for an authorised overdraft.

Fees and charges

It is really important to be aware that you will not only pay interest usually on an overdraft. You will normally have to pay fees as well. With an authorised overdraft you will normally have to pay a monthly fee and with an authorised overdraft you will often have to pay a daily fee. The costs of these therefore can differ considerably and so it is really important to be aware of what type of overdraft you have or whether you have both when you start to compare interest rates with other overdrafts offered by other banks and building societies. You may find it tricky to find out what these fees are on the websites of the banks and building societies so you may need to contact their customer service departments in order to find out details.

Current account perks

It is also worth noting if you get any perks in your current account. Some people pay for an account and as a result get free insurance or other benefits. Others might get interest paid on credit balances and things like this.  These might be important if you are comparing accounts as you want to make sure that you can get the equivalent with other accounts that you are considering. You may benefit a lot from these and if you change to a current account with an overdraft that has a lower rate, you might actually miss out financially as a result of not having these things. You will need to do some calculations to work out how much they are worth to you in financial terms so that you can see if you will save money or not if you switch.

Other lender benefits

There may be some ways that the lender stands out form others which may make you feel that you would rather pay more interest and stick with them. It could be that you have a branch nearby, that they have good customer service or that they are easy to contact. There are many reasons that we might prefer to stick with one bank or building society over another. However, do be careful that your customer loyalty does not make you stay with a bank that is very much more expensive. 

So, although it is important to make sure that you are not paying to much for your overdraft, the interest rates are not the only thing that you should be looking at. There are other factors such as the fees and charges that could affect the total cost of it. You may also get other benefits form the account or perhaps feel that you would pay more just to stick with that particular bank or building society.

You also need to be aware of how often you use your overdraft. If you do not use it at all then the cost of it is irrelevant unless you think that it is likely that you will use it in the near future. If you do use the overdraft then you do need to make sure that you are getting good value for money. It might be worth considering whether getting an alternative loan to repay it could be worthwhile, as it could be cheaper, but you will need to be careful that you can afford the repayments and that you do not get overdrawn again and have two debts to worry about. It is all worth some serious thought though. It is good to check whether you are paying significantly more than you could be and decide whether you would be happy to change to a different bank and building society in order to save money. Think about how much money you would need to save in order to encourage you to move and then you can do some calculations and see if any meet that.