UK caps interest rate on student loans
The government has announced a modest concession for millions of university graduates holding “plan 2” student loans. However, this decision is unlikely to resolve the ongoing debate regarding the burdensome cost of degree course debts.
Is this a government U-turn after all the controversy?
Not exactly. This move primarily addresses concerns that the conflict in Iran could drive inflation higher, potentially increasing student loan costs and generating further negative publicity for ministers.
The government is setting a cap on the interest rate for plan 2 loans at 6% starting from 1 September, with the possibility of extending this cap beyond that date.
This new cap will also apply to postgraduate — plan 3 — loans, which are loans taken out for master’s or doctoral courses by borrowers in England and Wales.
“This measure will protect students and graduates in England and Wales from the potential of inflation pressures due to the situation in the Middle East,” ministers stated.
For some students and graduates, the cap will result in a slight reduction in the interest added to their loan compared to current rates, causing their debt to grow marginally more slowly.
Is 6% lower than what people are paying now? Will my loan get cheaper?
To understand this, it is helpful to review the current system, which has been the source of considerable frustration.
The focus is on the estimated 5.8 million undergraduate students from England and Wales who took out plan 2 loans between September 2012 and July 2023.
Many of these graduates make monthly repayments deducted from their pay, but the amounts paid are overshadowed by the interest accruing on their debt. Consequently, the total amount owed continues to increase.
Plan 2 graduates currently repay 9% of their income above the annual threshold, a figure that will remain unchanged.
The change affects the interest applied to their debt, which will now be capped.
Each year, the government adjusts student loan interest rates based on inflation, using the Retail Price Index (RPI), which is consistently higher than other official inflation measures.
The current RPI rate applied (up to 31 August this year) is 3.2%. For some borrowers, the government adds a fixed 3% charge on top of this.
Therefore, plan 2 borrowers face a total interest rate of 6.2% while studying. After graduation, the interest rate depends on income, with higher earners (those earning £52,885 or more) charged the maximum 6.2%.
Postgraduate loan holders are also charged 6.2% interest while studying and afterward.
Thus, capping the maximum interest rate for plan 2 and plan 3 loans at 6% from September means some borrowers will pay 0.2 percentage points less than they currently do.
Why did the government act now?
Ministers are acting in anticipation of rising inflation rates. Interest rates are fixed for each academic year—from 1 September to 31 August—based on the RPI figure for the year ending the previous March.
The RPI figure for March 2026 is scheduled for release on 22 April. It is expected to exceed the current 3.2% rate; the February rate was 3.6%.
The Department for Education stated that the interest rate cap “removes the risk of any temporary increase in inflation causing loan balances to compound at an unsustainable rate… This will ensure no plan 2 or plan 3 borrower faces an interest rate of above 6%.”
Prime Minister Keir Starmer has previously indicated to MPs that he would explore ways to make the student loan system fairer, with speculation about more substantial reforms possibly being announced in the autumn.
What do students and others think of this announcement?
The National Union of Students (NUS) described the cap as “a huge win” for millions but emphasized that further action is necessary, especially regarding repayment thresholds.
Ian Futcher, a financial planner at wealth management firm Quilter, commented,
“The cap offers reassurance but not relief. Without movement on the repayment threshold, graduates will continue to feel the strain.”
