Deflation pushes student loan interest rate below zeroby Gill Montia

From today, graduates paying off student loans taken out before 1998 will see their outstanding balances shrink, even when no payments are made.The UK’s government-backed student loans system uses the Retail Prices Index (RPI) to set an annual interest rate, which is applied from 1st September.The RPI measure turned negative in March as the recession deepened, meaning that the rate payable on student loans taken out before 1998 now stands at minus 0.4%.The shift into negative territory is a first for the student loan scheme and according to reports, around 390,000 graduates will benefit.Meanwhile, the Student Loans Company has reduced to zero the rate payable by around 3.26 million students and graduates with loans taken out after 1998.The firm has defended its decision not to apply a deflationary rate, explaining that post 1998 loans are already “well-subsidised”.