Interest rates for certain student loans will be limited for the academic year 2026/27 in response to widespread discontent over graduates facing escalating debts. Many students have expressed frustration as their loan balances continue to grow each year, despite making regular payments, due to the interest rate conditions attached to the loans.
Currently, Plan 2 student loans carry a 6.2% interest rate while students are studying, calculated based on the Retail Price Index (RPI) plus 3%. After completing their studies, the interest rate is determined by their income, with higher earners facing RPI plus up to 3%. The interest rate is adjusted annually in September using the RPI from March of that year.
A recent update has announced that starting from September 1, interest rates on Plan 2 and Plan 3 loans will be capped at a maximum of 6%. This new cap is double the current inflation rate of 3%.
The Government aims to provide stability and safeguards for graduates amid concerns of potential inflation escalation due to conflicts in the Middle East. Chancellor Rachel Reeves has been under pressure to reform Plan 2 loans following her Budget announcement last year, where she froze the salary repayment threshold.
According to data from a Freedom of Information request by Compare the Market to the Student Loans Company, the largest outstanding student loan repayment as of January 2026 was £314,256, while the average loan balance for English students was £53,010.
Minister for Skills, Jacqui Smith, emphasized the importance of protecting borrowers within the student loan system amidst global uncertainties. The decision to cap interest rates on Plan 2 and Plan 3 loans aims to offer immediate relief to borrowers facing financial challenges.
Plan 2 loans cover undergraduate and Postgraduate Certificates of Education (PGCE) courses that commenced between September 1, 2012, and July 31, 2023, in England or after September 1, 2012, in Wales. Repayments start when graduates earn over £29,385 annually, with interest accruing from the first payment to the university.
Plan 3 loans are for postgraduate master’s or doctoral courses in England and Wales, with a repayment threshold of £21,000 a year. Graduates repay 9% of income over the threshold for Plan 2 loans and 6% for postgraduate loans.
The loans are written off 30 years after the initial repayment was due. Tom Allingham, a Student Loans expert at Save the Student, commended the government’s decision to cap interest rates as a measure of clarity during uncertain times but highlighted the need for further clarification on the application of the new rate.
