Student Loan Repayment Interest capped at 6%
Student Loan Repayment Interest capped at 6%
The government is capping the maximum interest rates on Plan 2 and 3 student loans at 6% from 1 September 2026, instead of RPI +3%, for the 2026/27 academic year. This will affect students and graduates in England and Wales and is against a backdrop of a Bank of England base rate at 3.75%.
However, it has not increased the repayment threshold, so graduates still face a punitive financial environment.
‘This reform removes the risk of any temporary increase in inflation causing loan balances to compound at an unsustainable rate and is in line with actions taken in the past to secure stability in the student finance system,’ the Department for Education said.
Graduates with Plan 2 loans currently pay interest rates of between RPI and RPI plus 3%, depending on their earnings. This rate is usually significantly higher than the government’s preferred CPI measure when increasing other thresholds.
Current students on Plan 2 and Plan 3 also have to pay an interest rate of RPI +3% while they are studying.
The average graduate debt for students on Plan 2 loans after leaving university rose to £53,000 in 2024-25, which was £5,000 higher than £47,000 just a year earlier.
Plan 2 graduates pay back student loans at a rate of 9% of their current earnings, on top of income tax, national insurance contributions (NICs), and other deductions such as auto enrolment work pensions. This can result in very high marginal tax rates for some high earning graduates.
The cap on interest rates comes after the government increased the repayment threshold for Plan 2 loans to £29,385 from 6 April.
There is no change for students on Plan 5 loans who will face a very low bar for starting to pay back their loans, close to the national living wage based on full-time earnings.
Graduates who started their courses from 2023 onwards are on Plan 5 loans with repayments kicking in at earnings of £25,000 over a 40-year payment period.
The interest on student loans is fixed by academic year, from 1 September to 31 August the subsequent year, based on the RPI value for the year to March 2026.