The cost of student loans can be a significant burden for many individuals. On top of that, the Dutch government’s plan to raise interest rates sharply is devastating news for almost every student who has taken out a loan. In a rather shocking development, the government announced that the interest rates on student debts will be increased from 0.46 percent to 2.56 percent from next year. This rapid increase represents a substantial jump, more than five times the previous rate.
Reasons for the steep change in interest rate
A change in interest rates can be influenced by multiple economic, financial, and political factors. The interest rate on student debt is directly proportional to the interest rates on Dutch government bonds. This simply means that when the interest rate on Dutch government bonds rises, the interest rate on student debt rises automatically. A rise in energy prices may not have a direct and immediate correlation with an increase in interest rates, but energy price fluctuations can indirectly affect the economy and potentially lead to changes in interest rates over time.
Effects on various individuals
An increase in interest rates on student loans can affect various individuals and groups in different ways. The interest rate is fixed every 5 years and it remains constant for those 5 years. The new interest rate of 2.56 per cent is set to apply from 1 January 2024, but that does not mean that it will be immediately applied to every outstanding student debt. For example, a former student who started repaying their debt this year will continue to pay 0.46 percent interest for another four years. Only after that will they have to pay a new interest rate. Current students will have to start repaying their debt 2 years after graduation, using the new interest rate.
Students who were entitled to have the basic grant (before 2015) will be paying an even higher interest rate: this has been increased from 1.78 per cent to 2.95 per cent. The reason is that the interest on these specific loans is calculated on a different reference date.
Consequences
An increase in interest rates on student debts could have remarkable impacts on the borrowers, making it hard to manage their debt and achieve their financial goals. For example:
- A higher interest rate means a higher overall debt burden, as the borrower will accrue more interest on their loans over time.
- Higher interest rates could be a cause of financial stress for recent graduates or students who are still in school.
- Increased interest rates also lead to longer repayment periods, as some borrowers may need to reduce their monthly payments to manage their daily expenses.
- This also results in reduced ability to save, spend and invest in other essential aspects of life.
Strategies to tackle financial issues
- Explore income-driven repayment loan options: Consider choosing an income-driven repayment loan. These specialized loans adjust your monthly payments based on your income. This way they become more manageable.
- Budgeting is vital: Creating a budget helps to manage finances effectively. It does not only help in reducing financial stress but also aid in fixing bad spending habits.
- Consider going for extra payments: Making extra payments helps to pay off your debts much more quickly. When you pay off the principal amount faster, it will reduce the overall total interest paid.
- Reserve fund: Consider building up an emergency fund, as this is extremely helpful for financial shocks. This way, you can avoid having to rely on other forms of credit or loans.
- Find sources of additional income: Try exploring additional sources of income such as part-time jobs or freelancing that could support you.
- Financial counselling: Sometimes, it is important to get advice from professionals who have expertise in student loan management. They can help you in taking an informed and decisive decision.
Written by Parul Sachdeva