The interest rate on plan 2 and plan 3 student loans will be capped at 6% from September, ministers have announced, amid concerns that higher inflation will drive repayments up for many graduates.
Ministers acted after months of criticism over the loans becoming a “debt trap” that often leave graduates in England and Wales paying tens of thousands more than the original loan amount.
Graduates with plan 2 loans currently pay interest rates based on the retail prices index (RPI) measure of inflation – currently 3% – plus up to 3%, when they earn more than £29,385. At present, students on plan 2 and plan 3 loans attract an interest rate of RPI plus an additional 3% while they are studying.
Plan 2 student loans cover those taken out for undergraduate courses and Postgraduate Certificates of Education (PGCE) since 1 September 2012 in Wales, and between 1 September 2012 and 31 July 2023 in England. Plan 3 student loans cover postgraduate master’s or doctoral courses for borrowers in England and Wales.
With the prospect of the Iran war pushing up inflation, the skills minister, Jacqui Smith, said: “We know that the conflict in the Middle East is causing anxiety at home, and while the risk of global shocks is beyond our control, protecting people here is not.
“Capping the maximum interest rate on plan 2 and plan 3 student loans will provide immediate protection for borrowers, supporting those who are most exposed within this already unfair system. We’re acting now to defend against the consequences of faraway conflicts in an uncertain world.”
The National Union of Students organised a protest in February over the chancellor’s decision to freeze the repayment threshold. Photograph: Sean Smith/The Guardian
However, the measures may not be enough to stem criticism of the system, with graduates already paying high interest rates compared with many other forms of debt.
Labour MPs have lobbied the government to instead think again about a freeze on the student loan repayment threshold – which will be kept at £29,385 for three years until 2030 and is likely to cause graduate repayments to rise by up to £300 a year.
Amira Campbell, the president of the National Union of Students (NUS), welcomed the announcement as “a huge win” but said the government needs to go much further. She said that ministers “have woken up to the unfairness of student loans and are taking action to prevent our debts from spiralling further out of control”.
“For too many years,” said Campbell, “we’ve been forced to weather these economic shocks and finally a government have listened to our concerns. This is a huge win, for the over 5 million people on plan 2 loans, the NUS and students’ unions across the country.
“But this change cannot come alone. For most graduates, the impact on their day to day lives is felt through the repayment thresholds, which are being frozen for three years and will get very close to the minimum wage by 2030.
“We still need to see the chancellor stick by the terms we signed at 17 years old and raise the threshold in line with our incomes. The government have said they will look into the unfairness of the student loan system and we will continue to hold them to that.”
The prime minister, Keir Starmer, has previously told MPs he would look at ways to make the student loans system in England fairer. The promise was made after comments by the Conservative leader, Kemi Badenoch, who said the system was “at breaking point” and had become a “debt trap” for graduates.
