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Student loans - of little interest?

  • Writer: Michael Hill
    Michael Hill
  • 1 day ago
  • 2 min read

The government has announced an interest rate cap for some student loans. It is not all it seems.


Following Easter, the Department for Education (DfE) announced a 6% interest rate cap on Plan 2 (and 3) student loans. The DfE press release read “Interest rate cap introduced to protect Plan 2 borrowers”. (1)


This was a somewhat creative interpretation. To see why, you need to delve into the arcane world of Plan 2 student loans, which were made for undergraduate courses starting between 1 September 2012 and 31 July 2023 in England, and are still being made in Wales. The loan ‘interest’ charged is linked to retail price index (RPI) inflation in March of each year, applied from the subsequent 1 September:

  • Until the April after graduation, interest is charged at RPI +3%, meaning that at present it is 6.2% as the March 2025 RPI was 3.2%. (2)

  • For graduates – the vast bulk of Plan 2 borrowers now – the interest rate varies between RPI and RPI + 3%, based on income. In 2026/27, RPI is charged for graduates with income up to £29,385 and RPI + 3% applies if income is £52,885 or more. (3)


The interest rate has no bearing on how much a graduate pays, only on how long they must make payments (subject to a maximum of 30 years, after which any outstanding debt is written off). The payment level is 9% of income over £29,385, a figure that the last Budget froze until April 2030.


The DfE made its announcement ahead of the RPI figure for March 2026, which was expected to jump from February’s 3.0% due to the war in Iran. There was already growing criticism of the Budget repayment threshold freeze, so to avoid further discontent at rising interest costs, the DfE rolled out a 6% interest cap (for one year only).


The March RPI turned out to be 3.3%,4 which means the minimum interest rate will be 3.3% and the maximum 6%. The sliding scale interest rate calculation means that only graduates with incomes above £50,535, and those few still studying, will benefit from the cap. (5)


With over £260 billion of outstanding student debt, (6) the hard financial truth is that your student loan is another area of your finances where you cannot look to the state for much support.


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