Interest on plan 2 and plan 3 student loans will be capped at 6% for the 2026/27 academic year, the government has announced. This is a temporary measure to guard against an expected rise in inflation on the back of the war in the Middle East. Currently, students with plan 2 and 3 loans are charged the RPI (Retail Prices Index) of 3.2% plus an additional figure of up to 3%. The latest RPI figure is due to be published on 22nd April.
The announcement comes after sustained criticism of the student loans system from across the political spectrum. With inflation expected to rise this year, causing more pain for graduates, the government has decided to act. However, this relatively small alteration to the repayment structure is unlikely to do much to ease the pressure on the government to robustly tackle the simmering student loans problem.
The skills minister, Jacqui Smith, said: "Capping the maximum interest rate on plan 2 and plan 3 student loans will provide immediate protection for borrowers, supporting those who are most exposed within this already unfair system. We’re acting now to defend against the consequences of faraway conflicts in an uncertain world."
Amira Campbell, the president of the National Union of Students (NUS), welcomed the announcement, but warned: "We still need to see the chancellor stick by the terms we signed at 17 years old and raise the threshold in line with our incomes. The government have said they will look into the unfairness of the student loan system and we will continue to hold them to that."
Who will benefit from the interest rate cap?
The cap will apply to graduates and students with a plan 2 loan or a plan 3 loan, also called the postgraduate loan. Plan 2 covers undergraduate courses started by English and Welsh students from 1st September 2012 (up to 31st July 2023 in England), while plan 3 covers postgraduate courses.
Graduates with a plan 2 loan currently pay the RPI rate of interest, plus up to 3% depending on their earnings. Plan 3 graduates always pay RPI plus 3%.
Here is how plan 2 interest works for graduates:
| Annual income | Rate of interest charged |
| £29,385 or less | RPI |
| £29,386 to £52,884 | RPI plus up to 3% |
| £52,885 or more | RPI plus 3% |
Keep in mind that this only applies to graduates on plan 2 loans. You pay the maximum interest on both plan 2 and plan 3 while you are studying, even though you are unlikely to be making any repayments.
All this means that higher earners (and current students) pay more interest and so will benefit the most from the cap. These are also the people most likely to pay their loans back in full. As plan 2 and 3 loans are written off after 30 years, the many graduates who wouldn't be able to pay it off under any interest rate will also not benefit from the cap.
Kate Ogden, senior research economist at the Institute for Fiscal Studies, said the cap "will only reduce actual loan repayments in the long run from the roughly third of graduates that can expect to repay their plan 2 loans in full. It will do nothing for graduates who are lower-earning currently, who will still see their interest rate set at RPI and therefore likely below the new cap."
More recent student borrowers from England who started university on or after 1st August 2023, will be on the plan 5 loan, which charges RPI without any add-on rate and is not subject to the cap.
How much does it cost to go to university?
If you do not pay your fees upfront, it is essentially impossible to work out how much your university degree will cost you in England, even decades after you have graduated. The cost of going to university is based on a complicated combination of loan repayment thresholds, inflation figures, interest calculations, headline fees, maintenance loans and support grants.
The jump to a £9,000 maximum yearly fee in 2012 was deeply controversial, but just as significant was the decision to charge an interest rate of RPI plus 3% on student loans from day one of a course. It was part of a wholesale restructuring of the student loan repayment system that saw graduating borrowers pay 9% of their earnings over a set threshold towards their debt. The threshold was expected to rise each year, but it has not kept up with average earnings and has been frozen multiple times, including by the current government for the next three years.
Student loans were reformed again in 2023 to lengthen the period before the debt is written off from 30 years to 40 years for new students and decrease the threshold at which they start making repayments.
How many graduates repay their student loans?
The structure of student loans allows interest rate changes to grab headlines, even if they are not the most influential factor in the overall cost of university. The government forecasts that only around 56% of the full-time undergraduates who started their course during the 2024/25 academic year will repay their loans in full. For a significant part of the 44% who do not, increasing fees or rising interest will be far less significant than the repayment threshold and the final cut-off period.
This is because if your cut-off period arrives with a significant balance remaining, less overall debt will make no difference and any extra repayments will have had no impact. However, for higher earners who will pay off their loan, less interest will mean fewer repayments and ultimately a lower overall cost for going to university.
In other words, the cost of going to university is usually dependent on the repayment scheme rather than the fees or the interest. For example, students starting university in 2012 faced £9,000 fees and an interest rate that reached 12% in 2022, but they benefited from a higher repayment threshold than the 2011 intake and a shorter cut-off period than the 2023 intake. Students starting in 2011 would have missed the fee hike, but would have had to start repaying their debt on a lower salary. 2023 students will not be charged as much interest as their predecessors, but they will keep repaying it for an additional 10 years, which could mean they pay much more overall.
What will happen to student loans in the future?
The government has committed to making the student loans system fairer, but it is not clear what this will look like. Most major changes to the student loan system have not been applied retrospectively, but because the specific terms of each plan are not enshrined in law, the government can make any changes it deems politically viable. Unlike with a commercial loan provider, the government is not restricted by regulation or watchdogs. This means it could halve a plan's repayment threshold, extend the maximum loan period or double interest rates whenever it chooses. Alternatively, a government could opt to raise thresholds, cut interest rates or even replace repayments with an entirely new system.
You can read more about student debt in our article 'Student debt: What you need to know about repaying your student loans'.
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