Interest rates on plan 2 and 3 student loans to be capped at 6%

Interest rates on plan 2 and 3 student loans will be capped at 6% from September following mounting criticism over the cost of repayments.

The UK Government said the move would help deliver stability and protections for graduates amid the prospect of increased financial pressures due to the Middle East war.

Interest on plan 2 loans is currently paid at a rate of between Retail Price Index (RPI) inflation and RPI plus 3%, which currently stands at 6.2%, depending on earnings.

Current students on plan 2 and plan 3 also face an interest rate of RPI plus 3% while they are studying.

From September 1, interest on plan 2 and 3 student loans will be capped at 6% instead of RPI plus 3%, in a bid to protect borrowers, the Department for Education said.

Plan 2 student loans are those taken out for undergraduate courses and Postgraduate Certificates of Education since September 1 2012 in Wales, and between September 1 2012 and July 31 2023 in England.

Plan 3 student loans cover postgraduate masters or doctoral courses for borrowers in England and Wales.

Chancellor Rachel Reeves has faced growing calls to reform plan 2 loans in particular after her budget last year, in which she announced the salary threshold would be frozen at £29,385 for three years starting from April.

She initially defended the student loans system as “fair” but last month said it was “broken”, while indicating any changes were not an immediate priority.

Skills minister Jacqui Smith said the UK Government is “continuing to look at the broken plan 2 system we inherited” more broadly.

“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,” she said.

“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.

“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.”