Switching the inflation measure used to calculate student loan interest could dramatically reduce the long-term cost of university debt – saving some graduates tens of thousands
Ministers are being urged to replace the retail prices index (RPI) with the consumer prices index (CPI) when calculating interest of England’s “Plan 2” student loans.
These loans apply mainly to undergraduates who began courses between September 2012 and July 2023, as well as Welsh students who started from September 2012.
The proposal may sound technical, but the difference between the two measures can translate into significantly higher interest charges over decades.
What RPI and CPI actually measure
Both RPI and CPI track inflation, which is how quickly prices rise, but they are calculated differently.
RPI
One of the UK’s oldest inflation measures Includes housing costs such as mortgage interest payments Uses an older statistical method that tends to produce higher readings Widens cost increases due to its calculation formulaCPI
The UK’s main official inflation measure and the Bank of England inflation target Uses a more modern statistical method Excludes most housing costs Typically runs one to two percentage points lower than RPIIn 2013, the Office for National Statistics (ONS) concluded RPI was no longer a reliable measure for policymaking. Despite this, it still underpins student loan interest.
How student loan interest works
Under the current system, Plan 2 loans charge interest at RPI, rising to RPI plus 3 per cent depending on income.
Interest accrues from the day the loan is paid, and graduates repay 9 per cent of earnings about £28,470 – rising to £29,385 in April 2026. Any remaining balance is written off after 30 years.
Crucially, interest rates affect the size of the debt, not monthly repayments, which are income-based.
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On average, a graduate must earn about £66,000 per year before they can start to pay off any debt.
Because repayments depend on salary, many borrowers see their balances grow if interest accumulates faster than they repay.
Speaking to The i Paper, Nick Hillman, director of the Higher Education Policy Institute and one of the architects of the system, said it is “distinctly odd that the government still heavily rely on a measure that independent statisticians have told them is not fit for purpose.”
He continued: “So, it does make sense to look at this afresh.
“However, RPI is not always guaranteed to be lower than CPI so, if the goal is lower loan balances, the campaigners should be calling for the lower of the two measures at any point in time rather than just one or the other.”
This would look similar to the triple-lock policy, which ensures the state pension rises each year by either inflation, average wage growth, or 2.5 per cent – whichever is highest.
Hillman pointed out that while he thinks it’s a good idea, it doesn’t lower repayments today.
Current rates
For the 2025-26 academic year, RPI used for student loan calculations is 3.2 per cent and the Plan 2 interest ranges from 3.2 per cent to 6.2 per cent, depending on income.
CPI inflation – 3.4 per cent – currently sits below RPI – 4.2 per cent, continuing a long-running trend.
RPI has historically run higher than CPI, meaning borrowers pay more interest over time.
What graduates could save if it was switched
If introduced, the change could save some borrowers as much as £15,400 on a £100,000 loan repaid over 30 years, our calculations show.
Even mid-sized loans see big benefits with around £11,600 saved on £75,000 repaid over 30 years, and over £7,700 on £50,000.
Shorter-term or smaller loans also gain, with a £10,000 loan repaid over 25 years saving about £1,230, showing the cumulative impact over time.
Why many balances keep rising
The system is designed so higher earners repay more, but it produces unintended consequences.
Monthly repayments are linked to income rather than the size of the debt. If interest accrues faster than repayments, the balance increases even while payments are being made.
Research by the Institute for Fiscal Studies (IFS) suggests many graduates never repay their loan in full before it is written off.
Who would benefit most from a switch?
A move from RPI to CPI would particularly help:
Graduates with debts above £50,000 Middles earners repaying slowly over decades Borrowers whose repayments barely cover interest Those unlikely to clear their debt before write-offBecause CPI typically tracks lower inflation, balances would grow more slowly and total interest would fall.
Alex Stanley, vice president of higher education at the National Union of Students (NUS), said: “The current student loan system is freezing our future. The student loan system is in dire need of an overhaul.
“As students we struggled with rent and bills, our parents stepping in to fill that void. And now as graduates we are living pay cheque to pay cheque while paying back hundreds, if not thousands, while the loans still grow.
“Transforming the interest rates, unfreezing the repayment threshold and capping interest would put money back in the pockets of graduates each month and stop this fiscal drag we are feeling.”
Support for reform has spread across the political spectrum, with policymakers acknowledging concerns about fairness, rising graduate debt and long-term affordability.
Labour peer Lord Blunkett, former Tory education secretary Gillian Keegan, Gavin Williamson, Justine Greening and Nicky Morgan have reportedly backed the idea.
Switching to CPI would reduce costs for borrowers but increase the government subsidy required to run the student finance system – a key obstacle in tight public finances.
It comes as Downing Street has begun drawing up plans to help graduates stuck with spiralling debts.
No 10 is understood to be in talks with the Treasury and the Department for Education (DfE) about how to reform the system despite Chancellor Rachel Reeves previously defending the status quo.
The DfE has been contacted for comment.
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