Interest rates on certain student loans will be limited for the academic year 2026/27 in response to widespread dissatisfaction over graduates facing escalating debts. Many students have expressed concerns that their student loan balances continue to grow annually despite making regular payments, primarily due to the interest rate structure in place.
Currently, Plan 2 student loans accrue interest at a rate of 6.2% during the study period, 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%. Starting September 1, the interest rates on Plan 2 and Plan 3 loans will be capped at a maximum of 6%, doubling the current inflation rate of 3%.
In light of potential inflation spikes resulting from the Middle East conflict, the government aims to provide stability and safeguards for graduates. Calls for reforming Plan 2 loans have escalated, particularly following Chancellor Rachel Reeves’ Budget announcement last year, which 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 amounted to £314,256, while the average loan balance for English students stood at £53,010.
Minister for Skills, Jacqui Smith, emphasized the importance of protecting borrowers within the student loan system by capping the maximum interest rates on Plan 2 and Plan 3 loans. The government also plans to reintroduce maintenance grants and review the existing student finance system for fairness.
Plan 2 student loans cover undergraduate courses and PGCE programs 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 accumulating from the first payment to the university.
Plan 3 loans cater to postgraduate master’s or doctoral courses in England and Wales, with a repayment threshold of £21,000 per year. Borrowers on Plan 2 loans repay 9% of income above the threshold, while those on postgraduate plans repay 6%. Loans in England and Wales are written off 30 years after the initial repayment date.
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, he highlighted the need for clarity on whether the 6% rate will apply universally or as a variable rate, urging the government to provide further guidance promptly.
