Student loans could fall to zero percent

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Deflation has occurred for the first time in the UK since the 1960s and the Retail Prices Index (RPI) figure has been used to track the interest rate payments on student loans.

However there has always been much speculation as to what would happen if the RPI would turn negative and yet last month, this stopped becoming a moot point and became reality.

The interest rate for student loans is calculated to be the lower of the RPI or the Bank of England Base Rate +1 percent. The government has yet to make a decision on how loan interest is to be calculated with students even hopeful that their student loans could be earning them interest.

This would effectively reduce the amount students will have to pay back as in real terms, the value of their loan is greater. However this would only happen if ministers do not change the way the interest is calculated on student loans.

The department for Innovation, Universities and Skills said that an announcement will be made soon following a consultation with the Treasury.

The interest rate that is in question is due to take effect from 1st September 2009, so a spokesman for the department has said that, at present, there is no need for an immediate decision.

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