Interest rates on plan 2 and 3 student loans will be capped at 6% for one year from September, the government has announced.
The measure will protect students and graduates in England and Wales from the potential of inflation pressures due to the war in the Middle East.
The decision comes after mounting criticism of the student loan system, with many graduates seeing their debts grow to more than they ever borrowed due to high interest rates.
Interest on plan 2 loans is currently paid at a rate of between RPI and RPI plus 3%, depending on earnings. At the moment, this means the rate varies between 3.2% and 6.2%. Students on plan 3 loans also face an interest rate of RPI +3%, and this applies while they are studying and after they graduate.
From 1 September, interest on both plans will be capped at 6%.
With the prospect of the Iran war pushing up inflation, skills minister 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.”
What’s the difference between the loans?
Plan 2 student loans are those taken out for undergraduate courses and Postgraduate Certificates of Education (PGCE) since September 2012 in Wales and between September 2012 and July 2023 in England.
Plan 3 student loans cover postgraduate master’s or doctoral courses for borrowers in England and Wales.
Responding, Tom Allingham, student loans expert at Save the Student, said: “We’re pleased to see the government get ahead of a likely spike in RPI by capping the interest applied to Student Loans, giving students and graduates some clarity in these uncertain times.
“It’s also notable that, as things stand, the other two student loan plans operating in England (1 and 5) will continue to charge a much lower rate of interest.
“That a cap can be introduced, and plan 2 and 3 graduates will still be charged significantly more interest than those of different generations, surely highlights the system’s deeply embedded inequalities.
“Amid the ongoing student loan inquiry and growing cries from students and graduates for reform, we’re calling on the government to announce far more substantial changes that create a truly fair system.”
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Graham Nicoll, financial planner at NCL Wealth Partners, said the student loan system needs to be simplified.
“This is a helpful short-term safeguard that limits volatility and gives borrowers more certainty,” he said. “Although it does not go far enough as 6% is still relatively high, and many borrowers will continue to see their balances grow, both while they study and after graduating.
“This highlights a deeper issue in that the system is complex, opaque, and often feels punitive.”
