Government proposes interest rate cap to protect Plan 2 borrowers

The government says it plans to cap the maximum interest rates on Plan 2 and Plan 3 student loans at 6 per cent. It intends to implement this cap from 1 September 2026 for the 2026/27 academic year. The measure intends to provide stability and protection for graduates amid rising student loan interest rates.

The government believes that the cap will protect students and graduates in England and Wales from potential inflationary pressures linked to developments in the Middle East. It says graduates should not face higher loan costs as a result of a conflict in which the UK has no direct involvement.

The government states it has designed the change to reduce the risk of temporary inflation increases causing loan balances to rise rapidly, consistent with similar interventions taken previously within the student finance system.

How Plan 2 and Plan 3 interest rates would be affected

Graduates with Plan 2 loans currently pay interest rates set between RPI and RPI plus 3 per cent, depending on their earnings. The government currently charges students on Plan 2 and Plan 3 loans an interest rate at RPI plus 3 per cent while studying.

However, the government’s new proposal intends to change this. It plans to cap interest on Plan 2 and Plan 3 student loans at 6 per cent. The government says this would protect borrowers from short‑term increases in RPI. RPI may be inflated by global economic shocks. This includes temporary increases in oil prices, which the government says is outside its control.

Previous changes to the student finance system

According to the government, the proposal follows changes already made to the student finance system it inherited. This includes increasing the repayment threshold for Plan 2 loans to £28,470 in April 2025. It was the first increase since 2021. The government has raised the threshold again to £29,385 from 6 April this year.

The government says it is continuing work to make the student finance system fairer for students, graduates and taxpayers.

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 Plan 2 system we inherited, and the wider student finance system, to make it fairer for students, graduates and taxpayers.”