The interest rate on student loans will rocket from zero to between 1.5 per cent and 4.4 per cent from 1 September. 

For income-based, or contingent loans, issued after 1998, the interest rate will increase to 1.5 per cent, from the 0 per cent rate it was set at for the 2009-10 school year.  

If you have a fixed loan, sometimes called a mortgage style loan, taken out before 1998, the interest is set by the retail prices index and will increase to 4.4 per cent next week, a massive hike from the -0.4 per cent interest incurred in the academic year just ended. Student loan rates are set by March’s RPI and this is applied for one year, every September. 

The monthly repayment amount for fixed-loan repayments is calculated on the total amount borrowed, plus interest (based on RPI), divided by the total number of months over which you repay.

Student loans issued after 1998 are considered cheaper and are set at the lowest of either the RPI or the Bank of England’s base rate, currently 0.5 per cent, plus 1 per cent. These loans are not paid back until the student graduates and is earning £15,000.

However, if the base rate changes interest may rise further. The Student Loans Company warns that rates could increase in the next school year, between 1 September 2010 and 31 August 2011, which would push up the interest charged on student loan repayments.

Aaron Porter, NUS president, says the government should take into consideration the fact that a graduate’s earnings may decrease, when it reviews the student loan system this autumn. ‘The amount a graduate contributes must reflect their real earnings and not maintain a situation where the debt they have taken on to pay for their education continues to rise as their earnings decrease,’ he argues.

You can read more about how to help fund your child through university in the September edition of Money Observer, out now.