Plan 2 student loan interest rates capped at 6% in England

Interest on some student loans in England will be capped at 6% in the next academic year.

The government said the cap on Plan 2 and postgraduate loans aimed to protect graduates from the risk of rising inflation due to the Iran war.

Skills Minister Baroness Jacqui Smith said it wanted to "defend against the consequences of far-away conflicts in an uncertain world".

There have been calls to lower the interest rate on Plan 2 student loans as part of a wider overhaul of the system.

The cap will apply to Plan 2 student loans - which were issued in England between September 2012 and July 2023 and are still issued in Wales - for the 2026-27 academic year.

It will also apply to Plan 3, or postgraduate, loans.

The Plan 2 interest rate is the retail prices index (RPI) measure of inflation plus up to 3%, depending on earnings, where higher earners see their overall debt rise at a higher rate.

It is set every September, using the RPI in March that year. It is currently 3.2% (RPI in March 2025) plus up to 3%.

That means the debt of the highest-earning graduates has been rising by 6.2% this year.

RPI for March 2026 has not yet been published, but it was 3.6% in February.

Analysts believe the rate of inflation is on the rise as a result of the Iran war.

This is not the first time a cap has been introduced. The government imposes caps when it thinks inflation, and therefore the interest rate, will grow too high.

Caps were in place for Plan 2 loans between July 2021 and February 2022, then again from September 2022 to August 2024. The highest cap was 8%.

Baroness 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."

She said the caps would "provide immediate protection for borrowers, supporting those who are most exposed within this already unfair system" and that the government was "continuing to look at the broken Plan 2 system we inherited".

"We're acting now to defend against the consequences of far-away conflicts in an uncertain world," she added.

Amira Campbell, president of the National Union of Students, called it a "huge win" but said further change was needed - including reversing freezes to the repayment threshold announced in November's Budget.

"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," she said.

"But this change cannot come alone. 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."

Other campaigners have welcomed Tuesday's announcement, but repeated their calls for wider reforms to the system.

Tom Allingham, from the Save the Student campaign group, said he was "pleased to see the government get ahead of a likely spike in RPI", but added that ministers needed to "announce far more substantial changes that create a truly fair system".

Oliver Gardner, founder of Rethink Repayment, also welcomed the cap but said the "temporary measure is by no means a solution to the student loans crisis".

Nick Hillman, director at the Higher Education Policy Institute, said while the change would be welcomed by many, it was "just a stopgap" that was "unlikely to assuage the concerns" of many graduates.

Laura Trott, Conservative shadow education secretary, said the government was "tinkering around the edges, while graduates will still be paying interest above inflation".

MPs launched an inquiry into student loans in England in March amid "widespread dissatisfaction" over repayment terms.

It came after the BBC found the government had compared student loan repayments to a £30-a-month phone contract in a presentation to teenagers a decade ago, and presenters were asked not to use the word "debt".

Sir Nick Clegg, the former Liberal Democrat leader, told the BBC the current university tuition fee system was a "mess".

BBC analysis also found that the amount of money graduates are voluntarily paying to try to clear their debt has risen, while some graduates told us the combination of loan repayments and income tax has led them to slash their salaries.