Higher student loan rates begin

Student loans have become a common financial factor for young people

Millions of graduates will now start paying interest on their student loans again as new interest rates come into effect.

Payments to the Student Loans Company include a 1.5% interest rate from 1 September for those who took out a loan after 1998.

The interest rates stand at 4.4% if the loan was taken out before this.

Graduates have enjoyed interest-free loans for the last year owing to the way the rates are calculated.

The new rates replace ones of 0% on the post-1998 loans and -0.4% on the pre-1998 ones which have applied during the last year.

Calculations

Interest on student loans is based on either the Retail Prices Index (RPI) measure of inflation in March or the highest base rate charged by a group of banks plus 1%, depending on which is lower.

Because RPI was 4.4% in March, the rate for the coming year will be calculated from banks' rates in March, which were lower. This will be the base rate of 0.5% plus 1%, giving a rate of 1.5%.

The rate could increase during the year if there is a change to the Bank of England Bank rate, which is likely to be mirrored by the banks.

About 3.3 million people have a student loan taken out after 1998, while 355,600 have one taken out before 1998.