The move - which is expected to be confirmed by the government this week - will not only help cash-strapped graduates struggling to clear their debt but will fight back against the 'normalisation' of only making minimum repayments on loans, according to debt charity Credit Action.
While it's best to avoid any interest on debt at all, The Student Loans Company, which is owned and run by the government, does not charge commercial rates on loans.
Students starting university from this September will be charged the Retail Prices Index (RPI) measure of inflation when they graduate on earnings of £21,000 a year. Even income of between £21,000 and £41,000 will only be charged at a maximum rate of RPI plus 3%.
By contrast, even the very best personal loans from a bank or building society charge 6% interest or more. So what happens if you want to clear these commercial loans before their end date?
When you take out a personal loan, the agreement between you and the lender is based on how much you are borrowing and over what timeframe, for example, two, three or five years. This way, both lender and the borrower knows how much total interest will be repaid.
If you choose to pay your loan off ahead of schedule however, the lender stands to lose out on some of those interest payments and you are likely to be charged a penalty to make up for some of this loss.
These days however, personal loans tend to be fully flexible which means these charges are kept to a minimum. So how do they work?
The cost of getting ahead of schedule
Frustratingly, when it comes to personal loans, banks and building societies typically won't allow you to make monthly overpayments at all - they simply don't have the capabilities with their systems.
However, it could be the case that you took a loan over a period that is now too long because your circumstances have changed, for example you got a pay rise and have more monthly income with which to clear the debt. Given the fact that some providers will lend over 10 years, this situation is not unlikely.
But, this doesn't mean to say you are sentenced to pay interest for the loan term you originally signed up for, said MoneySupermarket's head of loans, Tim Moss: "If you want to reduce your debt term, the best option could be to take another loan over a shorter time period - say three to five years - and pay off the 10-year loan balance completely. In this case, you will typically only be charged a penalty of one months' interest for clearing the debt early and, overall, would pay a lot less in interest."
But clearly, it still makes sense to opt for the most competitive rate with your new loan. The first port of call then is to shop around for the best rate at a comparison website such as
The current market-leader for a £7,500 loan is currently
M&S Money which is offering borrowers a representative APR of 6% over a five-year period.
For the same loan amount and repayment period, the next joint best providers are
Tesco Bank and Sainsbury's Finance both of which offer slightly higher representative APRs of 6.1%.
It's worth noting however, that if you want to borrow less than £7,500, or take the loan for a shorter time period, rates are likely to be higher.
Personal Payment Protection Insurance (PPI)
When taking out a loan, you will probably be offered Payment Protection Insurance (PPI) which pays out if you run into difficulties in meeting the monthly repayments. For example, if you lose your job, have an accident or become temporarily sick.
However, PPI has been in the news a lot in recent years after wide-spread mis-selling of the product led to a review on how it is sold.
If you are at all concerned about how you would cope financially if you lost your job or were unable to work through ill-health, PPI might be suitable for you, although it can slap a lot extra onto your monthly loan repayments.
In this case if you had any other means of funding the money, such as savings or even family who could step in until you can earn again, this would be a much better option.
If you do decide to take out PPI, it's vital that you check the small print carefully to see exactly what you will and won't be covered for - these products can be littered with exclusions.
You should also look at any deferment period which is the time before the policy starts to pay. Bear in mind also that, even if your PPI provider does agree to pay out, it will typically only be for a 12-month period.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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