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Thursday, 26 February 2009

What a Negative RPI Means to Students Past and Present.

RPI, CPI, MPI … I could write 500 words and still be listing the many Three Letter Acronyms (TLAs) used in the financial sector! However at the moment the RPI should be of interest to anyone who has taken out a student loan from the Student Loans Company since 1998. “The Retail Price Index is an important domestic indicator of inflation in the United Kingdom (UK). It measures the average change from month to month in the prices of goods and services purchased in the UK.” ( Now, in a recent report the Bank of England predicted that, “RPI inflation is likely to turn temporarily negative in the next few months.” (Bank of England Monetary Policy Committee Inflation Report, February 2009, 34) This will generally be good for all consumers as it will mean prices have fallen. However, for anyone with a student loan it is extra good news.

When a majority of students apply to University they apply for a loan from the Student Loans Company, whether it is a tuition fee loan, maintenance loan, an income assessed loan, a non-income assessed loan or any combination of the above. It is just what you do. I remember being under the impression that you did not pay interest on your student loan until you had finished studying. I couldn’t tell you who told me that or why I believed them, but I did. Boy was I in for a rude awakening when I got my first statement through at the beginning of my second year at Uni. The interest on student loans is admittedly lower than those on commercial loans. However, over Spring and Summer 2008 the rate was as high as an extortionate 4.8%!! Whilst it has dropped with the fall in the base rate and is now at 2% they were making a lot of money out of us for a while. On the Student Loans Company website it states that, “this interest rate is based on the annual March Retail Price Index (RPI) or the highest base rate of a number of major banks plus 1%; whichever is lower.” ( I would like to draw your attention to the last three words of that statement, “whichever is lower”. The Student Loans Company acknowledges that the RPI is usually lower and as a result bases their interest rate on it. NOWHERE does it mention what will happen if the RPI becomes negative, probably because this has never happened in the history of Student Loans. This could be a good or a bad thing. By not mentioning the phenomenon at all, to date, the Student Loans Company could add another clause to their Terms and Conditions capping the rate at 0% if they feel it is necessary. If they do not then an interest rate of -0.5% until March 2010 could certainly help out students when it comes to making the repayments!! The Student Loans Company will start paying off your loan for you, by paying you 0.5% interest! That’s nearly as much as the average ISA is paying at the moment!

We will have to wait and see what happens and we don’t have to do that for long! With forecasters saying that things are going to get a lot worse, certainly worse than the recession in the early 1990s, before they get better this little break from the building of more debt will certainly help to boost the economy when students graduate in the next few years and have more disposable income. Since there are no qualms about sticking to the RPI when it sky rockets I do not see why the Student Loans Company should be able to change the rules when things are in the borrowers’ favour for a change. But when has banking ever been fair?

To read the Bank of England Monetary Policy Committee Inflation Report in full and get a fuller picture of the UK economy go to:

1 comment:

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