What the interest rate cap on student loans means for graduates

Decision to cap rate at 6% from September is unlikely to defuse row over crippling cost of debt

The government has announced a small concession for millions of university graduates with “plan 2” student loans.

However, the decision to cap the interest rate charged at 6% from September is unlikely to defuse the row over the crippling cost of degree course debts.

Is this a government U-turn after all the controversy?

No, not really – this is more to do with addressing fears that the Iran war will push up inflation, which could make student loans even more expensive (and generate more bad headlines for ministers).

The government is capping the  interest rate on plan 2 loans at 6% from 1 September, “for the 2026-27 academic year” (and possibly beyond).

This new cap will also apply to postgraduate – plan 3 – loans (those taken out for master’s or doctoral courses by borrowers in England and Wales).

“This measure will protect students and graduates in England and Wales from the potential of inflation pressures due to the situation in the Middle East,” say ministers.

For some students and graduates, the cap will mean a small reduction to the interest added to their loan compared with what happens now, so their debt will grow very slightly more slowly.

Is 6% lower than what people are paying now? Will my loan get cheaper?

We probably need to spool back a little and briefly explain the current set-up, which has caused so much anger.

The row that has raged in recent weeks has focused on the estimated 5.8 million undergraduate students from England and Wales who took out a plan 2 loan between September 2012 and July 2023.

Many of these graduates are handing over money from their pay packet every month to repay their loan, but everything that is taken is dwarfed by the interest that is being added to their debt. As a result, the sum they owe is getting bigger and bigger.

Plan 2 graduates currently have to hand over 9% of everything they earn above the annual threshold, and that isn’t changing.

What is changing – for some students and graduates – is the interest applied to their debt. This will be capped.

Each year, the government revises interest rates on student debt based on the current pace of inflation. It’s worth noting that the measure of inflation used is RPI, consistently the highest of the three official indices.

The RPI rate being applied at the moment (up to 31 August this year) is 3.2%. But for some people, the government then adds a fixed charge of 3%.

So for those on plan 2, the total interest rate while they are studying at university is currently 6.2%. After they finish their course, the interest rate depends on their annual income. Higher earners (those on £52,885 or more) are charged the maximum rate of 6.2%.

You are also charged 6.2% while studying, or after if you are on a postgraduate loan plan.

So, as can be seen from the above, capping the maximum interest for those two loan types at 6% from September means some students and graduates will pay 0.2 percentage points less than they do now.

Why did the government act now?

Ministers are acting ahead of an expected increase in the rate of inflation. The interest is fixed by academic year – from 1 September to 31 August – using the RPI figure for the year to March prior.

The March 2026 RPI figure is due to be announced on 22 April. The expectation is that it will be higher than 3.2%; the rate for February was 3.6%.

The Department for Education said the interest rate cap it had announced “removes the risk of any temporary increase in inflation causing loan balances to compound at an unsustainable rate … This will ensure no plan 2 or plan 3 borrower faces an interest rate of above 6%.”

The prime minister, Keir Starmer, has previously told MPs he would look at ways to make the student loans system fairer, and there has been speculation that a bigger change might announced in the autumn.

What do students and others think of this announcement?

The National Union of Students (NUS) said this was “a huge win” for millions of people, but more action was needed, particularly on the repayment thresholds.

Ian Futcher, a financial planner at the wealth management firm Quilter, said: “The cap offers reassurance but not relief. Without movement on the repayment threshold, graduates will continue to feel the strain.”