10 September 2018 • HOP, Bas Belleman
Interest rate on student loan debts to rise
The government is going to increase the interest rate on student loan debts. Why exactly are they doing this, and how much will you have to pay?
On 4 September, the government submitted the legislative proposal for the new interest rate on student loan debts to the House of Representatives. The proposal is guaranteed to cause fierce debates about student loans, but what is it all about exactly?
Why is the interest rate being increased?
Because it provides money to the government.
What will I have to pay?
You will probably not pay anything extra, since the higher interest rate only applies to new students from 2020. However, it may affect your younger brother or sister.
Ok, what will they have to pay?
The average student loan debt is estimated to soon become 21 thousand euros. Currently, students repay around 70 euros per month. Their younger brothers and sisters will have to fork out 82 euros per month. So, that is an extra 144 euros per year.
That is rather a lot.
You only pay if you are able to do so. Anyone who remains on the minimum wage will not have to repay anything. That is why the government refers to it as a social loan system. Your monthly repayment amount is at most four percent of your income above the minimum wage. Student loan debts are only repaid after two years, and this can take 35 years. You can also use so-called ‘repayment holidays’ in which you do not have to repay anything. This will remain the same, irrespective of whether the interest rate rises.
What do the coalition parties gain from this?
Not very much from a political perspective. The opposition will be offered an easy target and the current government will not reap the benefits of this higher interest rate. In 2025, so in seven years’ time, the government will first receive a small extra amount of money. Only in 2060 will the higher interest rate generate 226 million euros per year.
So, why are they doing it?
Their argument is that they want to do something about the ‘interest rate subsidy’.
Since you asked, we’ll explain it a little. Interest on student loan debts is currently at an unprecedentedly low level, namely zero percent. That is because the interest rate is linked to the interest rate that the government itself sets for 5-year government loans. Student loan debts are far longer than this. It may take 42 years to fully repay the debt. For this reason, the interest rate on student loan debts should be increased.
This is why the government will soon be using the interest rate on 10-year loans as a yardstick. On average, this interest rate was 0.78 percentage points higher over the last 10 years than the five-year interest rate. Therefore, the interest premium of ex-students will be reduced slightly. According to the government, this is better for the ‘sustainability’ of government finances.
How does that work? Didn’t that interest rate have something to do with ‘paying out of your own pocket’?
This is how critics see it. The government is halving the tuition fees for first-year students, which appears to be a gift. However, the basic grant has been abolished, which means that students will incur greater debts. Anyone who is forced to take out a high loan will ultimately pay for the halving of the tuition fees through the increased interest rate.