Some students and graduates are likely to pay slightly less interest on their student loans than expected as a result of action taken by the government this week.
But while many higher earners will benefit from the news that interest will be capped at 6% for the 2026-27 academic year, many others are likely to have more interest added to their student loan from this autumn than is being applied at the moment. For that, they can blame Donald Trump.
The row over millions of graduates trapped by ballooning debts has focused on plan 2 loans. These were taken out by students from England who started university between September 2012 and July 2023, and students from Wales who have started since September 2012.
Many have money taken from their pay each month to repay their loan, but what they pay off is dwarfed by the interest that is being added every month, so the sums they owe are getting bigger.
What has the government done?
It has announced a cap on the interest rate on “plan 2” student loans from 1 September until 31 August 2027.
This 6% cap will also apply to postgraduate – AKA plan 3 – loans (those taken out for master’s or doctoral courses by borrowers in England and Wales).
Plan 2 and plan 3 graduates have to hand over a percentage of everything they earn over a threshold (the rules are different for each), and that is not changing.
What is changing is the interest that’s applied to their debt.
Every year ministers revise interest rates on student debt based on recent inflation data. They use the RPI measure of inflation for March.
The RPI rate being applied at the moment is 3.2%. But for some people, the government adds up to 3% to that.
For those on plan 2, the total interest rate while they are studying at university is now 6.2%. After they finish, the interest rate depends on their annual income. Higher earners – those on £52,885 or more – are charged the maximum rate of 6.2%. Those earning £29,385 or less are charged 3.2%, while those earning between those two amounts pay between 3.2% and 6.2%
You are also charged 6.2% if you are on a postgraduate loan plan.
But for a year from September no one will pay more than 6%.
Why did ministers act this week?
Because of concern that the Iran war will push up inflation and make student loans even more expensive.
The March 2026 RPI figure will be published on 22 April, and most experts believe it will be higher than last March’s 3.2% figure as a result of the war. The rate for February was 3.6%, and it had been expected to fall before the US airstrikes on Iran changed the trajectory for prices.
Speaking to the Guardian on Wednesday, Sanjay Raja, the chief UK economist at Deutsche Bank, said it was forecasting that the March RPI inflation figure would be 3.88%, while the wider market was predicting 4.08%.
What does this mean for my debt?
Let’s assume that the RPI figure for March comes in at 4%.
If you are a plan 2 person on a low income – less than £29,385 a year – the interest being added to your loan will go up from 3.2% to 4%.
But if you are a plan 2 higher earner on £52,885-plus, you will pay a little less than you do now – 0.2 percentage points less, to be precise. Without the cap, you would have been paying 7%.
The Institute for Fiscal Studies says in this scenario, the cap might reduce total expected lifetime loan repayments for a high-earning plan 2 holder by about £500 in today’s prices.
For those earning between those two thresholds, with RPI at 4% most would pay more, but a few would pay slightly less because of the cap.
Tom Allingham, a student loans expert from the website Save the Student, says the interest rate on student loans has no impact on people’s monthly repayments, which are only determined by their salary.
He adds: “The interest only affects how quickly your balance grows – and as most plan 2 borrowers won’t repay their loans in full before they’re cancelled, this cap will only have a material financial impact on the highest earners, who will now clear their debts slightly earlier.”
