There may be good news for students who have taken loans. Students will get to see their debts reduce over time, even without repayments, as the interest rates turn negative in a move. Almost 390,000 graduates, having outstanding student loans will be able to benefit from this.

Interest rate on student loan sinks to –0.4%

The UK’s current period of Retail Prices Index (RPI) deflation, will see the interest rate payable on student loans taken out before 1998 sink to minus 0.4%. This will be the first time the interest rate has turned negative, since the Government-subsidized loan service was launched.

The interest rates are revised every September

Based on the level of RPI inflation in March of the respective year, the Student Loans Company resets the interest rate payable on every September 1. In March, the RPI turned negative for the first time in almost 50 years, plunging from zero to minus 0.4% as the recession bore down on the UK.

Good news for pre-1998 students

This will be good news for students that were enrolled before 1998, with still outstanding debts and who have not yet reached the salary threshold for repayment, as they will have their loans reduced without having to pay anything back.

Interest rates reduced to zero for post-1998 student

It is estimated that someone who has £10,000 in outstanding debt will owe £9,960 at this point next year. But it can be termed as "unfair" for the 3.26 million students and graduates with post-1998 loans, who will only see their interest rates reduce to zero.

According to an expert, while interest-free loans sound great, actually many students could rightly feel diddled. Everyone’s rate should be minus 0.4%, but the Government exploited a post-1998 loans technicality to prevent this. As the cost of goods are shrinking, your loan should too. It won’t; this means your spending power will be eroded.

The Student Loans Company said the decision not to apply negative rates to loans after 1998 was taken because loans are already well-subsidized.

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