Interest on Plan 2 and 3 Student Loans Will Be Capped at 6% Instead of RPI+3% From 1st September

• Interest on Plan 2 and 3 student loans will be capped at 6% instead of RPI+3% to provide borrowers with certainty in an uncertain world
• Decisive action to protect graduates from the risk of student loan balances rising at an ‘unsustainable rate’.
• As the situation in the Middle East risks temporarily increasing inflation, DfE explain that government intervention will ensure borrowers don’t pay the price for a war which the UK did not start.

The government is capping the maximum interest rates on Plan 2 and 3 student loans at 6% from 1 September, for the 2026/27 academic year, delivering stability and protections for graduates from escalating student loan interest.

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. The Department for Education explained the rationale is so that graduates will not pay the price for a war which the UK has no direct involvement in.

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.

Graduates with Plan 2 loans currently pay interest rates of between RPI and RPI plus 3%, depending on their earnings. Current students on Plan 2 and Plan 3 also attract an interest rate of RPI +3% while they are studying.

No Plan 2 or Plan 3 borrower faces an interest rate of above 6%

Interest on Plan 2 and 3 student loans will be capped at 6% instead of RPI+3% to protect borrowers. This will ensure no Plan 2 or Plan 3 borrower faces an interest rate of above 6%, protecting them from any short-term increase in RPI due to global shocks, such as temporary spikes in oil prices, outside the government’s control. The government is clear this is not our war and the UK will not be dragged into conflict, but the impacts will affect the future of our country.

It follows changes this government has already made to the student finance system they inherited to improve it and make it fairer for students, graduates and taxpayers. This includes increasing the repayment threshold for Plan 2 loans to £28,470 in April 2025, its first increase since 2021, and they have increased it again on 6 April this year, to £29,385.

The government is continuing work to make the student finance system fairer for students, graduates and taxpayers.

Minister for Skills, 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 far-away conflicts in an uncertain world. More broadly, we’re bringing back maintenance grants and continuing to look at the broken Plan 2 system we inherited, and the wider student finance system, to make it fairer for students, graduates and taxpayers.” 

The Prime Minister has outlined plans to protect the UK public from the impacts of the conflict in the Middle East, including cutting energy bills, extending the cut to fuel duty, supporting those exposed to heating oil rises and taking back control of our energy security, by investing in clean British energy.

The government is making this change ahead of student loan interest rates being confirmed for the coming 2026/27 academic year. The interest that applies to student loans is fixed by academic year, from 1 September to 31 August the subsequent year, using the RPI value for the year to March prior (in this case, March 2026).

The student finance system also protects lower-earning graduates, with repayments determined by incomes and outstanding loans and interest being written off at the end of repayment terms. This write-off is a deliberate investment in our people and the economy. 

The Government has reconfirmed its commitment to widening access to higher education, announcing the return of targeted, means-tested maintenance grants from the 2028/29 academic year. Students from low-income households will receive up to £1,000 in additional support that won’t need to be repaid. Alongside this, the Government has set a target of two thirds of young people entering a gold standard apprenticeship, higher-level training or university by the age of 25.

The Welsh Government has agreed in principle to the UK Government’s proposal to cap interest rates on Plan 2 and Plan 3 student loans at 6% from September 2026, for the 2026/27 academic year.

Any formal decision to proceed in Wales, including Regulations, is a matter for the next Welsh Government and subject to Senedd approval.

Vikki Howells, Minister for Further and Higher Education, said:  

“I am pleased to support the proposed cap on student loan interest rates because of the protection it will offer for student loan borrowers in Wales. A final decision on applying the interest rate cap for Welsh borrowers will need to be taken by the next Welsh Government, following the Senedd election.”

Sector Reaction

Responding to the Government announcement to cap interest of Plan 2 and Plan 3 student loans at 6%, 

Amira Campbell, National Union of Students President said:

“This Government 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, 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 National Union of Students 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.”

Oliver Gardner, founder of Rethink Repayment, commented:

“We welcome today’s announcement that the Government will act to protect graduates from significant spikes in interest as a result of inflation caused by the conflict in the Middle East. This move makes it clear that the sustained pressure of our campaign is cutting through to politicians in Whitehall and that they know the student loan system is fundamentally unfair and in need of meaningful reform.

“However, this temporary measure is by no means a solution to the student loans crisis. It is merely a stop gap to help protect graduates with Plan 2 and Plan 3 loans from some of the most egregious aspects of the system: in particular, the maximum interest rate of up to RPI + 3% that can be charged on these loans.

“Whilst the announced interest cap of 6% will go some way to limiting the amount by which loan balances can increase, the majority of the public agree that even an interest rate of 6% is far too high for an educational loan.

“That is why our campaign is demanding a fairer student loan system that works for young people and gives them a realistic chance of paying back what they initially borrowed rather than watching their balances soar despite making significant monthly repayments.”

The government has today announced that interest rates on student loans issued to English students will be capped at 6% next academic year.

Kate Ogden, Senior Research Economist, said:

“In anticipation of a possible spike in inflation as a result of events in the Middle East, the government has today announced that interest rates on student loans issued to English students will be capped at 6% next academic year. If the March 2026 figure for RPI inflation comes in at more than 3% – as seems likely – this cap will reduce the interest rate applied to outstanding Plan 2 student loans held by higher-earning graduates who are subject to an interest rate of up to RPI plus 3%. It will only reduce actual loan repayments in the long run from the roughly third of graduates that can expect to repay their Plan 2 loans in full. If, for example, March RPI came in at 4%, the cap might benefit the highest-earning graduates by an average of around £500 over their lifetime. It will do nothing for graduates who are lower-earning currently who will still see their interest rate set at RPI and therefore likely below the new cap.”