I’ve heard a lot about inflation on the news, but what is it actually?
Inflation is basically the general level at which prices move. Inflation is when there is an UPWARDS trend in prices, while deflation is when there is a DOWNWARD trend in prices.
Most central banks aim at keeping inflation somewhere around 2-3%, which means things that you might regularly buy like coffee, bread or alcohol can increase in price a little bit from year to year.
Inflation is the reason the average price of a loaf of bread cost 37p in 1982 and today it’s over £1.
I guess that sounds normal. When does this become a problem?
One problem is that wages are meant to increase with inflation, but in the last few years this hasn’t been the case.
Wait a minute, I’m not earning wages so why on earth should I care?!
Well, your student loan accumulates inflation from the day you start university (+3% interest while studying), and the higher the rate of inflation, the bigger the debt becomes over time.
Historically hyperinflation has hit – this is very high inflation rate which accelerates. If we ever returned to this (and we really hope not), it’s possible your interest could be 15%, 20% or more per year.
Now matter how big your debt gets or how fast it’s growing, you keep paying back the same (9% of earnings over £21,000) so it will take you longer to pay off as the loan.
OK…What should I do about it then?
Unfortunately you have no control over inflation rates (unless you happen to be an expert hacker like on Mr. Robot – something we in no way condone). Though there are ways to protect yourself (historically people have bought gold for example)
Inflation is something that happens TO you and to your budget. But that’s no reason be feel deflated. Just being aware of it is enough so that you can budget your outgoings accordingly.
I didn’t appreciate that pun. Could you give an example of how student loans could be affected by varying inflation rates?
Well I don’t want to inflate your ego too much, but OK then:
(P.S. Also remember to keep the Student Loans Company informed of where you are and what your financial situation is after you graduate, so you never miss a repayment)