Interest rates on certain student loans are set to be limited for the academic year 2026/27 in response to widespread dissatisfaction among graduates grappling with escalating debts.
Many students have voiced concerns that their student loan burden continues to increase annually despite their consistent repayments, attributing this to the interest rate terms associated with the loans.
Currently, Plan 2 student loans incur a 6.2% interest rate during the study period, linked to the Retail Price Index (RPI) plus 3%.
Upon completion of their studies, the interest rate is determined by the borrower’s income, with higher earners facing an RPI plus up to 3% charge. The interest rate is recalibrated every September using the RPI from March of that year.
In a recent development, it was disclosed that interest rates on both Plan 2 and Plan 3 loans will now be capped at a maximum of 6% starting from September 1, doubling the existing inflation rate of 3%.
The government aims to provide “stability and safeguards for graduates” amid concerns of potential inflation escalation due to geopolitical tensions in the Middle East.
Chancellor Rachel Reeves has been under pressure to reform Plan 2 loans, especially following her Budget announcement last year, freezing the salary repayment threshold.
As per Freedom of Information data from Compare the Market to the Student Loans Company, the largest outstanding student loan repayment as of January 2026 stood at £314,256, while the average loan balance for English students was £53,010.
Minister for Skills, Jacqui Smith, emphasized the importance of shielding borrowers within the student loan system from external economic shocks, such as those arising from global conflicts.
The decision to cap interest rates on Plan 2 and Plan 3 student loans is seen as a proactive measure to safeguard borrowers and address the disparities within the current system.
Plan 2 loans cater to undergraduate courses and PGCE programs in England and Wales, commencing between specific dates. Repayments start once earnings exceed a certain threshold, with interest accruing from the first payment date.
Plan 3 loans cover postgraduate master’s and doctoral courses, with a repayment threshold set at £21,000 per year. Interest accumulates during the study period.
Repayment rates are determined by income levels, with 9% for Plan 2 loans and 6% for postgraduate loans over the threshold. The loans are written off after 30 years from the initial repayment due date.
Tom Allingham, a Student Loans expert at Save the Student, welcomed the move to cap interest rates, providing clarity to students and graduates amid uncertain economic conditions.
However, questions remain regarding the specifics of the interest rate cap and its implementation across different loan categories, underscoring the need for clear guidance from the government promptly.