Interest rates increasing

Minister wants fairer student debt repayment rules

Rente schuld
Photo: Pixabay

With interest rates on student debt rising above zero percent for the first time in years, it looks like the rates will vary among different cohorts of students. For students under the current loan system, the interest rate will be raised to 0.46 percent, which is slightly higher than previously predicted. As of January 1, the interest rate will be almost four times higher (1.78 percent) for students enrolled in vocational education (MBO), as well as for current and former higher education students who still fall under the old system.

Unfair to vocational students
Dijkgraaf thinks this is unfair to vocational students, so he will soon submit a legislative amendment to the House of Representatives proposing to harmonise the repayment rules between vocational and higher education. The Education Executive Agency (DUO) published the new interest rates earlier this week (Dutch only, Ed).

Under the new scheme, vocational students enrolling for the first time in the 2023-2024 academic year will pay the same 0.46 percent interest rate as higher education students under the loan system. Moreover, they will have 35 years – instead of 15 – to repay their debt.

Transitional rights
The new repayment rules will not only apply to future vocational students as of 2023-2024 but also to current vocational students, who will be in their second or third year at that time. They will be given "transitional rights" allowing them to choose between the old and new repayment terms. Those who don’t make a choice will automatically fall under the new system, which means their interest rates will be lower as well.

The current loan system’s repayment rules have been in place since 2015, when the government repealed the basic student grant and – in return – adjusted the loan conditions. These conditions were not adjusted for vocational students, who remained entitled to the basic student grant and the performance grant, nor were they adjusted for students in higher education who received a basic student grant for the entire duration of their studies. As such, the old system’s repayment rules still apply to these students.

140,000 students and graduates
The Ministry of Education stresses that the interest rate hike on January 1, 2023 will not immediately apply to all students and graduates yet, as DUO fixes students’ interest rates for five-year terms. For example, those who started repaying their debt this year will continue to pay zero percent interest for another four years. About 140,000 students and graduates will see their monthly repayments go up next year, the ministry estimates.

Consider a student who falls under the current loan system with a remaining debt of 20,000 euros and 20 years left to repay. An interest rate of 0.46 percent means their monthly instalment will increase by 3.91 euros. Those who still fall under the old loan system will pay 1.78 percent interest, which translates to a 5.16 euro increase each month.

Bleak scenario
The national student association (ISO) is concerned. “This interest rate will not cause serious financial problems right away”, writes chair Terri van der Velden in a press release. “However, we do worry about a bleak scenario in which interest rates will skyrocket in the next few years.” That’s why Van der Velden is calling for a cap on interest rates when it comes to student debt. “It would be a relief to know that the ball and chain you’ll be lugging around can’t keep growing indefinitely.” 

Tags: student debt