Interest rates for certain student loans will be limited for the academic year 2026/27 in response to widespread dissatisfaction among graduates facing escalating debts. Many students have expressed concerns that their student loan balances continue to grow annually despite making regular payments due to the interest rate structure.
Currently, Plan 2 student loans incur a 6.2% interest rate while students are studying, 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%. The interest rate is adjusted annually in September using the RPI from March of that year.
A recent announcement disclosed that starting September 1, interest rates on Plan 2 and Plan 3 loans will be capped at a maximum of 6%, doubling the current inflation rate of 3%. The government aims to provide stability and safeguards for graduates, especially considering the potential impact of rising inflation due to conflicts in the Middle East.
Chancellor Rachel Reeves has faced mounting pressure to reform Plan 2 loans, particularly following last year’s Budget announcement freezing the salary repayment threshold. Notably, 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 protecting borrowers within the student loan system by capping interest rates on Plan 2 and Plan 3 loans. The government is also considering reintroducing maintenance grants and reviewing the broader student finance system to enhance fairness for students, graduates, and taxpayers.
Plan 2 loans cater to undergraduate courses and PGCEs starting between September 1, 2012, and July 31, 2023, in England, or after September 1, 2012, in Wales. Repayments start once graduates earn over £29,385 annually, with interest accruing from the first payment to the university.
Plan 3 loans cover postgraduate master’s or doctoral courses in England and Wales, with a repayment threshold of £21,000 per year. Repayment rates are 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 original repayment due date.
Tom Allingham, a Student Loans expert at Save the Student, praised the government’s decision to cap interest rates on student loans amid potential inflation spikes, offering clarity to students and graduates during uncertain times. However, questions remain unanswered regarding the specific application of the 6% cap and the impact on low-earning graduates, urging the government to provide further guidance promptly.