Nearly four million graduates and students face a large hike in interest charges on their student loans after last week's unexpected leap in inflation.

Student loan rates are linked to the Retail Prices Index (RPI) measure of inflation for March each year. Figures published last month show it jumped to an 18-month high of 4.4%, meaning interest charges on student loans are set to surge.

This will come as a shock to graduates and students who are currently paying either no interest or negative rates of interest because of a fall in the RPI to a 50-year low of -0.4% last March. For many graduates on low incomes, a rise will mean their loans continue to grow even when they start making repayments, as the interest will be higher than their payments.

Each September the Students Loans Company sets interest rates on its loans, which are dependent on when the loan was taken out.

For 400,000 graduates repaying loans taken out before 1998, the interest rate is entirely based on the RPI. They are currently enjoying a negative rate of interest of -0.4%, based on the drop in inflation last year into negative figures. But from September they will start paying 4.4% on their outstanding loans, based on the new figure.

The interest rate for the remaining 3.3 million people who have taken out student loans since 1998 is either based on the RPI or the Bank of England base rate plus 1%, depending on which is lower.

This year those people's loan payments have been based on the RPI and they are paying no interest, as the rate was set at 0% (the negative RPI figure for last March should have resulted in a -0.4% rate, but the Student Loans Company said the borrowers were not entitled to negative rates). But the inflation rise will lead to an increase in the interest rate they pay, even though it will now be based on the Bank of England base rate.

The base rate has been 0.5% for the past 13 months, and if it stays the same, students will pay a new rate of 1.5% interest from September. However, many economists are forecasting at least one increase in the base rate before the end of the year. Any base rate increase before September will lead to rises in the student loan rate. The Student Loans Company says it cannot comment on rates until after the general election and will confirm the new ones in August.

Students currently at university or college can take out loans up to a maximum of £10,153 a year, meaning some are graduating with debts of more than £30,000.

Provided the base rate stays at 0.5%, the rise in the loans rate to 1.5% will add an extra £450 a year to the debt of students leaving university with the full loan this summer.

For students on low incomes this could mean that their debt continues to spiral even when they start earning. Repayments are due from the April after students finish their course, once they start earning over £15,000 a year. Borrowers repay 9% of their income over this amount out of their wages.

Even if the interest rate only rises to 1.5%, graduates on a salary below £20,000 who took out the full loan will find their repayments are less than the interest being added to their debt. A graduate earning £18,000 a year would receive £1,500 gross a month, £250 over the repayment threshold of £1,250 a month. This means student loan repayments would be £22 a month (9% of £250). However, at a rate of 1.5%, they would be charged £37.50 a month in interest.

The National Union of Students (NUS) says the system for repaying loans is broken and in need of radical review. Aaron Porter, NUS president-elect, says: "Clearly the rise is just further proof that the current system is not working. It is a bizarre system in which inflation in one month dictates interest rates over the whole year.

"We are asking for an urgent review to consider setting rates based on a 12-month cycle. The way that student interest is calculated makes it difficult to have any certainty in any given year.

"These are really challenging times for those on low incomes, especially when their payments do not even service the interest on their loans and their total debt is growing."

Despite the expected rise, student loans remain one of the cheapest ways to borrow.

Tim Moss, head of loans at comparison website moneysupermarket.com, says: "Student loans are phenomenally cheap. Even if the rates went up to 5%, they would still be one of the best ways to borrow money in the UK."

The cheapest comparable loan on the site is an unsecured one with a rate of 7.7%, significantly higher than even the 4.4% rate. Moss says the only way to get close to the rates for student loans is to juggle debt using credit cards with 0% balance transfers.

He adds: "I would be very careful about paying off student loans in a hurry. If down the line your finances are squeezed, it is better to have a student loan than even the cheapest loans or credit cards, especially as banks can be so choosy with their offers."

Case study

Lucy Philips, 23, has not paid back any of her student loan yet, despite graduating in 2008. The Exeter classics graduate is currently working as a school learning mentor and is not earning enough to start making repayments.

"I hope one day to pay off my loan, but at the moment it seems a long way away," she says. "The rise in the student loan rate means it will be even longer before I clear the debt. I owe around £13,000, which mainly went on accommodation."

Philips feels lucky she began her studies just before top-up fees were introduced: "I paid £1,175 a year in tuition fees, but the people in the year below paid £3,000, so owe a lot more than me. At the moment there are not many graduate jobs around, so many people's debts are just growing. A lot of those who graduated at the same time as me are still struggling to find well-paid work. I am earning £11,000 a year so have not even started to pay off my loan."