Students face interest rate hike as inflation rises
Students and graduates are likely to pay more interest on their student loans from September as inflation rises.
The retail prices index (RPI) rate of inflation rose to 1.6% in the year to March, up from 1.3% in the year to February, the Office for National Statistics (ONS) has announced today.
But March’s RPI is significant as it’s used to calculate how much interest students and graduates pay on their loans from that year’s September.
Different calculations are used for all three types of student loan; pre-1998 “mortgage style”, 1998-2012 “income-contingent style”, and post-2012, but all of these factor March’s RPI into the equation.
However, as this March’s RPI of 1.6% is higher than last March’s 0.9% figure, it’s likely student loan interest rates will rise from September, although the government doesn’t typically confirm the rates until the summer.
CPI also on the up
The ONS has also announced that the consumer prices index (CPI) rate of inflation rose to 0.5% in the year to March, up from 0.3% in the year to February.
It attributes the rise to an increase in airfares and clothing prices, although it adds that any further rise was held back by a fall in food prices and a smaller rise in petrol prices than a year ago.
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Commenting on today’s CPI inflation figure, Maike Currie, investment director for personal investing at Fidelity International, says: “While today’s figures sees UK inflation move further into positive territory, we remain far away from the Bank of England’s 2% target.”
She adds: “Today’s increase is unlikely to spur the Bank of England into considering raising interest rates on Thursday with widespread consensus that this week will see the 85th consecutive month that the bank keeps interest rates on hold at their emergency level of 0.5%.”
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).