Loan company owes students for once with negative interest rate

Published on Monday 31 August 2009 22:02

THOUSANDS of Scottish graduates are set to benefit as the interest rate on their loan turns negative today.

The move, by the Student Loans Company, means loans will actually reduce over time even without repayments.

The change has been made to bring the loan rate in line with the Retail Prices Index (RPI), to minus 0.4 per cent.

Recession has seen the RPI turn negative for the first time in almost 50 years, dropping from zero to minus 0.4 per cent in March.

It will go some way to rectifying an anomaly where, for several months pre-1998, borrowers were paying twice the rate of interest as those who took out loans after that date.

In February, The Scotsman revealed that 62,500 Scots were paying potentially hundreds of pounds more than borrowers under the new system.

It was calculated that someone with an 8,000 loan under the new system would pay only 144 a year in interest while someone with a pre-1998 loan would pay 304.

Around 62,500 Scots are still to pay off loans agreed before 1998, while 311,000 have new-style loans.

MoneySavingExpert.com has estimated the change means someone with 10,000 in outstanding pre-1998 debt will owe 9,960 at this point next year.

The founder of MoneySavingExpert.com, Martin Lewis, said it was not fair that the post-1998 rate would not drop below zero.

"While interest-free loans sound great, actually many students could rightly feel diddled," he said. "Everyone's rate should be minus 0.4 per cent, but the government exploited a post-1998 loans technicality to prevent this.

"As the cost of goods is shrinking, your loan should, too. It won't. This means your spending power will be eroded."

Student leader Liam Burns, NUS Scotland president, said the priority should be helping current students who were being forced to survive in the recession on high-cost credit cards.

He said: "Let's keep the focus on reducing commercial debt and getting money back into students' pockets so they have the chance to graduate at all."

A spokeswoman for the Student Loan Company said it was up to the UK government to set the rates and the company had no control over it.

She said:

"We cannot retrospectively change the terms and conditions that borrowers have signed up to."

LOAN RANGER: THE 1998 FACTOR

POST-1998 loans were created with a new rule decreeing their interest rate could not be more than 1 per cent above RPI.

Therefore their rates have dropped several times in the last year.

However, pre-1998 loan rates are only reviewed once a year, so they have not changed in a year. Currently, pre-1998 loans are payable once a person is earning 85 per cent of the national income, 25,936.

Post-1998 loans are repaid once the holder is earning 15,000 a year and repayments, at 9 per cent of annual salary, are deducted automatically from wages.