Interest on student loans quintupled at once: what this means for (former) students

The Parool – October 10, 2023, Sterre Marsman

The interest on student loans will increase more than fivefold next year. From 0.46 percent this year to 2.56 percent next year. What does this mean for (former) students? Six questions and answers.

The state is being sued for ‘not actively informing’ about the consequences and risks of a loan.

Legal Advice Wanted, a legal advisory firm, is taking the Dutch state to court. According to the advisory firm, the government has negligently and passively informed students about the amount of interest on student loans.

Credit providers such as banks in the Netherlands are subject to very strict rules. This leads to an increased duty of care, which includes the obligation to inform their customers about the consequences and risks of a loan in a mandatory and timely manner. This is to prevent them from burdening their customers with excessive debts.

“It would be strange if this duty of care did not apply to the government; after all, DUO provides credit to hundreds of thousands of students in the form of a student loan,” says Robin Bosch, founder of Legal Advice Wanted. “We believe that we can argue in a lawsuit that this duty of care also applies to the state.”

According to Bosch, the state has suggested for years that the interest would remain at zero percent. Former Minister of Education Ingrid van Engelshoven (D66) repeatedly stated in the House of Representatives that loan anxiety is unnecessary and that students can repay under social conditions.

1. Why is the interest rate increasing?

The interest rate on a student loan is linked to the interest on Dutch government bonds. This means that when the interest rate for loans from the Dutch government increases, the interest on a student loan also increases. This happens due to the influence of the European Central Bank and changes in the world, such as the rise in energy prices. In 2023, the interest on a student loan increased from 0 percent to 0.46 percent. From January 1, 2024, this will be 2.56 percent. This is more than five times as much, the highest level in fourteen years. The percentage has been higher before; for example, it was 4.17 percent in 2008, and even 11 percent in 1992.

2. Who is affected by the quintupled interest?

The situation is different for everyone because the interest rate is fixed every five years. The new interest rate will take effect from January 1, 2024, but that does not mean that the interest of 2.56 percent will be calculated on every outstanding student loan immediately.

For those who stop borrowing this year, the increased interest rate will apply from January 1, 2024. But that percentage is determined every five years. So for someone who, for example, stopped their loan in 2020, the interest rate of 0 percent will continue to apply until 2025. If you stopped borrowing in 2018, the interest rate of 2.56 percent will be applied next year.

Students who still had the basic grant (before 2015) will pay an even higher interest rate, namely 2.95 percent, where it used to be 1.78 percent. This is because the interest rate for these loans is calculated on a different reference date.

3. Wasn’t a free loan promised to students under the loan system?

No, according to spokesperson Tea Jonkman, the Education Executive Agency (DUO) never promised that. For six years, the interest on student loans did not fluctuate and remained at 0 percent. During that period, the loan taken out with DUO was indeed an interest-free loan.

“It was actually unique that the interest was 0 percent,” says Jonkman. She understands that the impression of advantageous borrowing was created. “Probably the interest rate of 0 percent led to normalization,” says the spokesperson. That’s why it is a shock for (former) students that the interest is suddenly increasing significantly. “The assumption of free borrowing surprised us. We didn’t shout in your face: ‘know what you borrow,’ but a loan is never free, so neither is this one.”

According to Emma Mouthaan of the financial advice platform Skere Student, DUO has failed in terms of information. “It’s actually bizarre that you can take out such a high loan at the age of eighteen without being able to see what the interest rate will do in the future,” she says.

She refers to an Instagram post in which DUO communicated with confetti that the interest rate would remain at 0 percent for another year. Mouthaan: “Credit providers have to meet a lot of conditions, think: ‘borrowing money costs money.’ Why is DUO exempt from that?”

4. What is the wisest thing to do with my student loan?

“In principle, for any interest-bearing debt, pay it off as soon as possible,” says Auke Schouwstra, spokesperson for the Dutch Association for Debt Counseling NVVK. “We see that former students with debts sometimes bury their heads in the sand, but these are substantial amounts.”

For example, on a student loan of €30,000, you pay €768 in interest annually in the first year with an interest rate of 2.56 percent. If you have a lower income and, for example, pay off €64 per month – you repay based on your financial capacity – with this interest rate, you are only repaying your interest, and your debt remains at €30,000.

Schouwstra: “If you are still paying 0 percent interest due to the fixed rate for the next 5 years, it is advisable to pay off as much as possible now.”

Saving on a separate savings account with interest and then paying off in one go is not always more favorable, says Marten Van Garderen, economist at ING. “If the interest on your student loan is 0 percent, and that on your savings account is 1.25 percent, you could say that this tactic is worthwhile. But if it’s the other way around, your debt rises faster than you save, it’s useless.”

5. What about the impact on a mortgage?

A student loan is not BKR registered, which means that lenders cannot request the debt. However, it is legally required to truthfully report a student loan to a mortgage lender if asked. If you hide that and they find out, it is fraud. For example, at De Hypotheker, it is now a requirement that you provide the data via DUO.

This is confusing, according to the chairman of the ASVA Student Union: “It has been communicated that this debt would not have any impact on buying a house because it is not registered, but now it turns out to be the case with this detour.”

6. Will the interest on student loans always remain this high?

That is not certain, but ‘the sharp increase of the coming year is exceptional,’ says Van Garderen. Often, the interest on the capital market rises with inflation, he explains. It is not common for it to shoot up as much as it is now. He expects the interest rate increase to flatten out next year: “The worst is over.” Although it will not feel that way for those who graduated in 2023. This group will pay the fixed interest rate of 2.56 percent for the next five years.