Student loans: interest rates around the UK

A quick note on the way interest rates apply in the  2 current UK loan schemes.

Under the old scheme,  called Plan 1, still used by Scotland and Northern Ireland, the interest rate is tightly capped.  As the SLC explains:

“From 1 September 2013 until 31 August 2014, the interest rate for the Plan 1 Income Contingent Repayment Loans will be the lower of the Retail Prices Index in March 2013, or 1% above the highest base rate of a nominated group of banks. As the RPI for March 2013 was 3.3%, the maximum rate of interest you will be charged between 1 September 2013 and 31 August 2014 is 3.3%. However, due to the low interest rate cap, the rate from 1 September 2013 will 1.5% until further notice, but that rate may vary if the bank base rate is increased or decreased.”

Under the new scheme, Plan 2, being used for new students in England and Wales, the interest rate is  higher:

Retail Price Index (RPI) plus 3% is currently 6.8%.  But this rates applies only while students study and once they are relatively high earners.  Otherwise they are on lower rates, though still higher than in Scotland or Northern Ireland.

This post explains why work by Nicholas Barr challenges the intuitive response many people will have, that the lower the interest rate on student loans, the fairer the scheme is to those on lower incomes.

Within the Plan 2 scheme, high interest during the period of study will strike many who  think of themselves as progressive as intrinsically a bad thing.  However, it  acts as a disincentive to people  taking out loans not for immediate use, but with the intention of banking them.  That reduces the risk that a high minimum universal loan can have a  regressive effect – for example, if  young people from richer homes use that to build a fund they can use after university to obtain further advantages in life, say, by making it possible to do an internship or a taught postgraduate qualification.  That option will not be available for those for whom the loan provides essential living cost support.

In the new Scottish system, better-off students whose parents are prepared to continue covering their living costs now have the ability to put away nearly £20,000 over 4 years at an interest rate of 1.5%, as a buffer against the ups and downs of post-graduation life.  They can repay it without penalty at any point.  It’s not the biggest way the current system  in Scotland entrenches existing advantage among students in higher education – that remains undoubtedly the skewing of  Scottish graduate debt as a whole towards the poorest students.  But it’s one we shouldn’t lose sight of completely.