Interest rates on certain student loans will be limited for the academic year 2026/27 in response to widespread dissatisfaction among graduates facing increasing debts. Many students have expressed concern that their student loan balances continue to grow annually despite making regular payments, due to the interest rates attached to the loans.
Currently, Plan 2 student loans incur a 6.2% interest rate while studying, based on the Retail Price Index (RPI) plus 3%. After completing their studies, the interest rate is determined by their income, with high earners facing an RPI plus up to 3% charge. The interest rate is adjusted every September using the RPI from March of that year.
In a recent update, it was revealed that interest rates on Plan 2 and Plan 3 loans will be capped at a maximum of 6% starting September 1. This represents double the current inflation rate of 3%.
The government aims to provide “stability and protections for graduates” amidst concerns of potential inflation escalation due to conflicts in the Middle East. Chancellor Rachel Reeves has faced growing pressure to reform Plan 2 loans, especially following announcements in the previous year’s Budget freezing the salary repayment threshold.
According to information obtained through 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, with an average loan balance of £53,010 for English students.
Minister for Skills, Jacqui Smith, emphasized the importance of safeguarding borrowers within the student loan system by capping interest rates on Plan 2 and Plan 3 loans at 6%. The government is also reintroducing maintenance grants and reviewing the current student finance system to enhance fairness for students, graduates, and taxpayers.
Plan 2 student loans cover undergraduate courses and Postgraduate Certificates of Education (PGCE) starting between September 1, 2012, and July 31, 2023, in England, or after September 1, 2012, in Wales. Repayments begin once earnings exceed £29,385 annually, with interest accruing from the first payment to the university.
Plan 3 student loans apply to postgraduate master’s or doctoral courses in England and Wales, with a repayment threshold of £21,000 per year. Repayment is set at 9% of income over the threshold for Plan 2 loans and 6% for postgraduate loans, with loans in England and Wales being written off 30 years after the initial repayment was due.
Tom Allingham, a Student Loans expert at Save the Student, welcomed the government’s decision to cap interest rates on student loans amid economic uncertainties. However, questions remain regarding the specifics of the interest rate cap and its impact on borrowers, particularly those with low incomes. Clarity and guidance from the government are essential to address these concerns promptly.
