Ministers have announced that the interest rates on student loans are set to be capped amid fears that the conflict in the Middle East could drive up inflation.
The Department for Education confirmed on Tuesday that graduates on Plan 2 and Plan 3 student loans would see interest on their debt capped at 6 per cent.
Skills minister Jacqui Smith said the Government was aware that the war with Iran was “causing anxiety at home”, adding: “While the risk of global shocks is beyond our control, protecting people here is not.
“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,” she said.
The announcement comes amid growing concern over the scale of the student debt crisis. Outstanding student loan debt in the UK reached over £292bn by 2025, with English borrowers accounting for £266bn.
Graduates in England now leave university with an average debt of roughly £53,000, according to the House of Commons Library, with the total balance projected to reach £500bn by the late 2040s.
Here is how the change will work, and what it could mean for your student loan repayments.
How do student loans work?
While the student loan system in the UK is legally a loan, some say it functions more like a graduate tax.
Repayments are based on earnings, not total debt, and the balance does not impact your credit score. Student loans are also wiped after a certain number of years. Your level of interest and what you repay depends on what kind of loan you have. The total debt includes tuition fees and maintenance loans taken out.
These are the plans that today’s changes will apply to:
Plan 2: For English students who started a degree between September 2012 and July 2023, or Welsh students who started after September 2012. The annual tuition fee for standard full-time courses is currently £9,790. As of this year, you repay 9 per cent of your earnings over £29,385. Interest currently ranges from 3.2 per cent to 6.2 per cent, depending on your income. The balance is written off after 30 years.
Plan 3: For English and Welsh postgraduate students who started after April 2016. The annual tuition is currently £12,858. As of this year, you repay 6 per cent of your earnings over £21,000. This is paid in addition to any undergraduate repayments. Interest is currently set at 6.2 per cent, and the balance is written off after 30 years.
Other plans include Plan 1, which applies to students who started an undergraduate degree before September 2012. This was the last cohort that paid fees of up to £3,375 a year before the rate was raised in 2012 to £9,000.
Plan 1 loans are still available for students from Northern Ireland, who currently pay tuition of £4,985 a year, much lower than their counterparts in England.
Scottish students studying in Scotland do not pay tuition fees, but are required to repay any maintenance loans they take out.
English students starting an undergraduate degree after August 2023 are put on Plan 5 loans, which have a much lower repayment threshold of £25,000. The balance is written off after 40 years.
What has the Government announced?
The Government has confirmed that those on Plan 2 and Plan 3 student loads will see their interest rates capped at 6 per cent. Interest rates for other plans will not be affected.
Interest rates for student loans are set each year in September and are calculated based on the Retail Prices Index (RPI) inflation rate from the previous March. That means the new cap will apply from September 2026.
The same formulas for calculating student loans will still apply, but the maximum possible rate will not surpass the new cap.
For Plan 2 student loans, the interest rate is calculated depending on your earnings. If you earn under £29,385, you pay the RPI inflation rate, currently 3.2 per cent.
For those earning between £29,386 and £52,884, you pay the RPI rate plus a variable rate depending on income, up to a maximum of 3 per cent. The maximum you will currently pay is 6.2 per cent. Plan 3 student loans are also currently set at that maximum rate.
The interest on student loans varies between different cohorts, but it is most punishing for those on Plan 2 loans, where the interest can be inflation-busting (Photo: Getty)How will this affect your repayments?
The Government’s announcement today will not change how much you repay each month, but it will change how fast you are able to pay down your debt.
How much of an impact the interest rate cap makes on your balance will depend on how high inflation hits in the coming months as the war in the Middle East takes its toll.
For example, following Russia’s invasion of Ukraine in 2022, interest rates on student loans jumped from 4.5 per cent to 12 per cent as inflation hit record highs. That meant that, for many graduates, their interest payments far outstripped their repayments.
Keeping interest rates lower reduces the likelihood that your interest payments will overtake whatever repayments you make, allowing you to bring down your debt faster.
However, the amount you see taken out of your paycheck each month will not change, as these rates remain unaffected.
What more could the Government do?
Anger over the state of the student loan system has grown since the Chancellor announced in November that she was going to freeze the Plan 2 repayment threshold at £29,385 from April 2026 to 2029. In short, this means more graduate incomes will become repayable as wages rise.
In February, the Conservative Party proposed capping the interest rates paid on student loans at the RPI inflation rate, rather than the current RPI plus 3 per cent.
The i Paper reported the same month that the Department for Education was looking at ways of relieving the strain on graduates who are currently grappling with above-inflation interest rates.
But a former senior civil servant said at the time that if the Chancellor wanted to put more money into graduates’ pockets now, she would need to raise the repayment threshold.
“The only thing you can do to give people relief is to increase the threshold,” they said. “Reducing rates reduces debt but has no impact on individuals for years.”
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