Finance
UK Caps Student Loan Interest Rates at 6% Citing Global Inflation Risks
Published by Global Banking & Finance Review®
Posted on April 7, 2026
2 min readLast updated: April 7, 2026
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The UK will cap interest rates on Plan 2 and Plan 3 student loans at 6% from September 2026 to shield graduates from inflation-driven spikes tied to RPI+3%. The measure responds to criticisms of an unfair system and looks to ease borrowing costs amid global inflation risks.
UK Sets Student Loan Interest Cap at 6% Starting September 2026 Due to Inflation
Government Announces Interest Rate Cap on Student Loans Amid Inflation Concerns
By Sam Tabahriti
LONDON, April 7 (Reuters) - Britain said on Tuesday it would cap interest rates on millions of student loans at 6% from September 2026, saying conflict in the Middle East risked pushing up inflation and sharply increasing borrowing costs for graduates.
Criticism of the Current Student Loan System
The student loan system in England and Wales has drawn criticism and Prime Minister Keir Starmer said in February he would look at ways to make it fairer.
The government has been accused by some lawmakers, including in his own Labour Party, of ripping off graduates with inflated interest charges and unfavourable repayment conditions.
Details of the New Cap
The Department for Education said on Tuesday the cap on so-called plan 2 and plan 3 student loans would apply for the 2026/27 academic year, overriding a formula that links interest rates to inflation and allows charges of up to the Retail Prices Index (RPI) plus 3 percentage points.
Rationale Behind the Cap
'BROKEN' SYSTEM
The government said intervention was necessary to protect borrowers from temporary inflation spikes caused by global shocks and graduates should not bear higher debt costs stemming from the war.
"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," said Jacqui Smith, the skills minister in the Department for Education.
She said the government would continue to look at what she called the "broken" plan 2 system to make it fairer.
Impact on Graduates and Loan Holders
Most criticism has focused on plan 2 loans, taken out by students who began university between September 2012 and July 2023. These loans are held by an estimated 5.8 million people.
Tuition fees have been capped at 9,535 pounds ($12,657) in England and Wales in the current academic year.
Graduates with plan 2 loans currently pay interest ranging from RPI to RPI plus 3%, depending on earnings. Students on plans 2 and 3 accrue interest at RPI plus 3% while studying.
If not repaid after 30 years, the debt is cancelled.
($1 = 0.7533 pounds)
(Reporting by Sam Tabahriti; Editing by Andrew Cawthorne)
Key Takeaways
- •From September 2026, interest on Plan 2 and Plan 3 student loans in England and Wales will be capped at 6%, overriding the usual RPI plus up to 3% formula, to protect borrowers against temporary inflation surges around global shocks such as Middle East conflict. (commonslibrary.parliament.uk)
- •Under current rules, Plan 2 interest ranges between RPI and RPI+3%—equating to about 3.2% to 6.2% after March 2025 RPI—and postgraduate (Plan 3) borrowers pay RPI+3% throughout. The cap will reduce the rate for high earners from 6.2% to 6%. (commonslibrary.parliament.uk)
- •This follows growing criticism of the “broken” student loan system. MPs have launched an inquiry into Plan 2 terms, including frozen repayment thresholds, amid concerns over fairness as debt for some graduates exceeds £50,000. (moneyweek.com)
References
Frequently Asked Questions about UK caps student loan interest rates at 6% citing global inflation risks
1What is the new interest rate cap for UK student loans?
The UK will cap student loan interest rates at 6% starting in September 2026 for plan 2 and plan 3 loans.
2Which student loans are affected by the interest rate cap?
The cap applies to plan 2 and plan 3 student loans in England and Wales.
3Why is the UK government capping student loan interest rates?
The government says the cap will protect graduates from inflation-driven borrowing cost spikes caused by global events.
4How many people hold plan 2 student loans in the UK?
An estimated 5.8 million people hold plan 2 student loans in England and Wales.
5What happens to UK student loan debt after 30 years?
If not repaid after 30 years, student loan debt under these plans is cancelled.
