Interest rates on plan 2 and 3 student loans will be capped following widespread anger over graduates being stuck with ballooning debts.
Under the current system, many students with plan 2 and 3 loans say their student loan debt is actually growing every year, despite them making regular repayments, due to the interest rate terms that are attached to them.
For a plan 2 or plan 3 student loan, the interest rate is variable and is charged at the Retail Price Index (RPI) measure of inflation plus 3%.
But in an update today, the Government announced interest rates will be capped at a maximum 6% from September 1 to help deliver “stability and protections for graduates” amid the possibility of inflation rising again due to the conflict in the Middle East.
The biggest outstanding student loan repayment as of January 2026 was £314,256, according to a Freedom of Information request by Compare the Market to the Student Loans Company. The average loan balance for those who studied in England was £53,010.
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Minister for Skills, Jacqui 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.
“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.
“We’re acting now to defend against the consequences of far-away conflicts in an uncertain world.
“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.”
Plan 2 student loans are for undergraduate courses and Postgraduate Certificates of Education (PGCE) that started between September 1, 2012 and July 31, 2023 in England, or after September 1, 2012 in Wales.
You begin to repay your plan 2 student loan when you earn over £29,385 a year, although interest starts to accrue from the day your first payment is made to your university, so while you are still studying.
Plan 3 student loans cover postgraduate master’s or doctoral courses for borrowers in England and Wales. The repayment threshold for a postgraduate loan is £21,000 a year. Interest also accrues while you are studying.
You repay 9% of your income over the threshold if you’re on a plan 2 student loan, or 6% of your income over the threshold if you’re on a postgraduate loan plan.
Plan 2 and postgraduate loans in England and Wales are written off 30 years after the April you were first due to repay.