Why will the interest rate be going up?
To fill the government coffers. Why sugar-coat it?
How much will I be paying?
Rates won’t be going up for current students – the interest hike kicks in for students who start studying in 2020. So the government’s plans may have consequences for your baby brother or sister.
OK – so what will they be paying?
On average, the total student debt for future students is estimated to be around EUR 21,000. The average monthly repayment for today’s students is EUR 70. The next batch of students will be paying back EUR 82 per month. That amounts to an extra EUR 144 per year.
You’re only expected to repay your loan if you can afford it. People with a minimum wage-level income are exempted, for example. That’s why the Cabinet has dubbed it a social loan scheme: your monthly repayment never totals more than 4% of your income in excess of the minimum wage. In addition, you have a two-year breathing period before payments start and you are given 35 years to repay your debt. And you have five ‘wild card’ years in which you can suspend repayments. These arrangements aren’t affected by a possible higher interest rate.
What’s in it for the coalition parties?
Not much, politically speaking. The opposition is provided with an easy target. And the current government won’t be reaping the rewards of this higher interest rate. The government will be enjoying the first modest increase in revenue in seven years’ time, and it will take until 2060 before extra income from the higher interest rate totals EUR 226 million per year.
So why are they doing it then?
They say they want to do something about the ‘interest grant’. If you’re really interested in knowing what that’s about we don’t mind explaining. Right now, the interest rate for student loans is at an all-time low: zero percent. That’s because this interest rate is linked to the interest paid by the State on 5-year government bonds. The problem is that student loans have a far longer term than that: it can take up to 42 years before a debt has been completely settled. That’s why the interest on student loans should be higher than it is.
In the near future, the government intends to use the interest on 10-year loans as a point of reference. On average, this rate was 0.78 percentage points higher over the past decade than the five-year interest rate. In other words, the proposed increase will slightly reduce the interest rate advantage currently enjoyed by ex-students. According to the Cabinet this move will contribute to the ‘sustainability’ of government finances.
What’s the position of the opponents of this plan?
Critics say it’s basically coming out of people’s own pocket. The Cabinet has cut tuition for first-year students by 50% – which seems a nice gesture at first glance. But students no longer receive a basic grant, meaning that they are forced to take on more debts. Students who have to take out a large loan will ultimately be financing the tuition ‘discount’ via increased interest payments.