Student loan interest rates set to riseInterest rate set at 1.5% from September

26 August 2010

Student loans have been interest-free for a year, but from the start of the new academic year in September they incur 1.5% annual interest. Older loans (pre-1998) will be charged 4.4%.

Students holding books walking to class

Full-time students do not count as residents

Student loans are far cheaper than any other form of borrowing. They are lent at deliberately low rates, designed to match inflation rather than commercial borrowing. Undergraduates take out a loan to cover academic fees - which are paid directly to their university - and a second maintenance loan to cover their living expenses. 

The amount you can borrow varies, depending on your parents' household income. Those from lower-income families can also apply for a maintenance grant, which replaces part of the loan and is non-repayable.  

How they work

Students borrow the money they need from the Student Loans Company and pay it back when they begin work. Repayments are normally deducted at source, via PAYE, but only once you start to earn over £15,000 a year. Above this figure, 9% of your salary goes towards paying off student loans. 

The interest charged on the outstanding amount varies each year. For loans taken out after 1998, it is Bank of England base rate plus 1%. With base rate currently at an all-time low of 0.5%, this gives the new rate of 1.5% for 2010-11. Students who took out a loan before 1998 pay a rate that reflects inflation (the Retail Prices Index) in March, which was 4.4%.    

Student bank accounts

Although students take out low-interest loans to cover their expenses, most need more than this to survive. Many take holiday jobs and an increasing number work during term as well. 

They benefit from special student bank accounts, which offer interest-free overdrafts to those who stay within their limit. The amount offered by each bank varies. Some, such as Halifax, allow first year students to rack up £3,000, while others, such as NatWest and RBS limit first year overdrafts to £1,000. These headline figures are general maximums and students may not be offered so much. Many banks increase a student's limit incrementally, starting at £500 in the first term, £1,000 in the second and £1,500 in the third. 

Which? money expert, Ian Robinson, says: 'These accounts can be a vital lifeline to cash-strapped students but they have to be treated with caution. Just because you have an overdraft facility, doesn't mean you have to borrow to the max as soon as you can. Try not to go over your limit. If there's any risk of this, talk to bank as soon as you can. Many allow extra authorised borrowing but charge high rates and penalty fees for any unauthorised borrowing.' 

Banks also offer student credit cards. These are not low-cost and should only be used for emergency, short term borrowing. 

Have your say       

Student loans are one subject currently being discussed on the new website Which? Conversation. This online forum invites you to comment on stories you have read and topics in the news. 

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