Ministers intervened to reduce a sharp rise in interest rates on student loans, after the recent rise in inflation meant rates would triple for many graduates by autumn.
The Department for Education said the maximum rate from September was to be set at 7.3% instead of the 12% it would have reached in September, based on earlier inflation figures plus 3%.
The DfE said the change meant the accrued interest of a borrower in England and Wales with a student loan balance of £45,000 would fall by around £180 a month, down from 12% interest rate .
Capping the maximum rate will primarily benefit wealthier graduates, according to the Institute for Fiscal Studies (IFS), as they are more likely to repay their entire loan within 30 years of graduation. Other graduates have any outstanding balance after 30 years.
The maximum interest rate is currently charged on loans to graduates earning more than £49,000 a year, but the change to the DfE means all graduates will be charged the same 7.3% – which is a steep increase on to the current 1.5% charged on loans from those earning £27,000 or less.
Michelle Donelan, Minister for Universities for England, said: “I want to reassure that this does not change the monthly repayment amount for borrowers, and we have brought this announcement forward to provide more clarity and peace of mind for graduates. .”
Monthly student loan repayments are based on income rather than interest rates or the amount borrowed. Graduates pay 9% of their earnings above a reimbursement threshold of £27,295 per year.
IFS’ Ben Waltmann said: ‘We said in April that the current student loan interest rate policy was deeply flawed and would lead to a rollercoaster of interest rates for graduates. It is great to see that, as we have suggested, the government has decided to act to avoid the roller coaster.
“However, for most graduates, this announcement will have little or no effect on their refunds. Most of those with undergraduate loans will probably never repay their loans in full, so the interest rate never affects their repayments.
But Larissa Kennedy, the president of the National Union of Students UK, said the new rates would still be “crucially high” for many graduates.
“Ministers should prioritize providing urgent cost-of-living assistance here and now. We hear from students who can’t even afford to keep taking the bus,” she said.