Student mortgage rate of interest cap: How it should work and what it means for you

The Government will cap student loan interest rates for millions, amid a major row over the costs facing graduates. 

The interest rate on some student loans will be restricted to 6 per cent for one year starting in September 2026, the Department for Education has announced.

It said it was doing this to protect graduates in the likely event that inflation spikes because of the war in Iran. Student loans are inflation-linked, so the interest graduates pay increases when inflation goes up. 

However, critics have said those on the Plan 2 and 3 loans covered by the new cap are still getting a bad deal, despite the changes. 

This is what you need to know about student loan interest rates and what impact the new cap will have. 

Who do the student loan changes apply to?  

The new interest rate cap will apply to any graduate who took out a Plan 2 or 3 student loan.

You will be on Plan 2 if you took out an undergraduate student loan between September 2012 and July 2023 in England and Wales. Plan 3 student loans cover postgraduate master’s or doctoral courses in England and Wales. 

Plan 1 student loans cover those who studied in England and Wales in the period before 2012, and Plan 5 from August 2023 to present. Plan 4 relates to Scottish students. These loans all have lower interest rates than Plan 2 and 3 loans, and their terms will not change. 

What is the interest on student loans now? 

Student loans start to accrue interest as soon as you start your course, and continue until you pay it off. The amount of interest you pay is set by the Government and changes every year.

The interest rate for student loans is set in September. It is partially based on the Retail Price Index inflation rate the previous March, with another amount on top which depends on which plan you are on and, in some cases, how much you earn. In March 2025, RPI was 3.2 per cent. 

Those on Plan 2 accrue interest set at RPI, plus an additional amount determined by their income. 

Those earning under £26,900 just accrue the RPI rate of interest, so will currently pay 3.2 per cent. Those earning between £26,900 and £39,130 pay RPI plus up to 3 per cent, with the rate decided on a sliding scale depending on their income. 

Those earning over £51,245 are charged RPI plus 3 per cent, so will currently pay 6.2 per cent interest. 

For a Plan 3 graduate, the interest rate is set at RPI plus 3 per cent. 

How will this change?

From September 2026 until the end of August 2027, the most a Plan 2 or 3 graduate  will pay in interest on their student loan is 6 per cent, no matter what the RPI inflation figure comes in at in March.   

The new 6 per cent rate has been set at double the current rate of inflation but is being hedged against fears that inflation could rise as a result of the Iran war – meaning student loan interest rates could rise too.

RPI for March 2026 has not yet been published, but it was 3.6 per cent in February. 

The March figure could rise significantly, because the conflict in Iran began at the start of March. This is the Government’s reason for bringing the change in. 

The Department of Education confirmed to This is Money that the new changes are a cap – not a flat interest rate. 

For example, if RPI rose to 4 per cent in March and you were in the lowest income bracket, you would still pay just 4 per cent, rather than the 6 per cent maximum. 

But if you earned over £51,245, you would not be charged 7 per cent (RPI plus 3 per cent). This would instead be capped at 6 per cent, so that is what you would pay. 

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.’

Have rates been capped before? 

A similar situation occurred in 2022, when the March RPI reading hit 9 per cent on Russia’s invasion of Ukraine – meaning graduates potentially faced 12 per cent interest repayments. 

In the end, the Government capped rates at 6.3 per cent  for Plan 2 and 3 borrowers.  

Ministers fear that the war in Iran could also increase inflation, due to the skyrocketing price of oil and as a result of the effective blockade of the Strait of Hormuz, a vital shipping lane.

This could have a knock-on effect on the price of all manner of other essentials from petrol to supermarket shopping and mortgage rates. 

What happens after 2026/27 and could it be extended?  

These changes are only confirmed for the next academic year, starting in September 2026.

It is still unclear whether the interest rate cap will be extended beyond that date.   

The Department of Education told This is Money that the interest rate would be under review but could not confirm a specific rate for a year’s time. 

How do student loans work?   

There are two parts to a student loan, the tuition fee loan and the maintenance loan.

Most undergraduates are entitled to a tuition loan, currently capped at £9,535 a year.

This is paid directly to the university by Student Finance – the partnership between the Government and the Student Loans Company, which runs the student loan system.

Maintenance loans to cover living costs are paid directly into students’ bank accounts. For the 2025-26 academic year, students studying in England can receive a standard maintenance loan of £4,915 without submitting household income details.

Students with a family household income of around £62,350 or less may be eligible for a higher maintenance loan, so their parents will be asked to provide income details.

You start to pay your student loan back once you start earning over a certain amount.

Unlike a standard loan, the system acts more like a graduate tax and increases the more you earn. What you pay back, and how, depends on which of the five different repayment plans you’re on.

Most of those heading to university this year, along with anyone who started studying after 1 September 2023, are on Plan 5. This means they start to repay when they earn over £25,000.

In Scotland, students are on Plan 4 and will start to pay back the loan once earning over £32,745 a year.

Those on Plan 2, who went to university between 1 September 2012 and 31 July 2023, will start to repay their loan once their income is over £28,470.

Those who started university before 1 September 2012 will be on Plan 1 and start repaying their loan once they earn over £26,056 a year.

All graduates, regardless of the plan they’re on, pay 9 per cent of their income over that threshold, while those with postgraduate loans pay 6 per cent.

Plan 1 loans are written off after 25 years, Plans 2, 3 and 4 after 30 years, and Plan 5 after 40 years. 

Why have Plan 2 loans been so controversial? 

Chancellor Rachel Reeves faced growing calls to reform Plan 2 loans after her Budget last year, in which she announced the salary threshold would be frozen at £29,385 for three years after it rises in April.

This meant that more graduates will be dragged into repayments than if the threshold rose in line with inflation. At the same time, inflation will mean a £29,385 salary is worth less in real terms as time goes on. 

Reeves initially defended the student loans system as ‘fair’ but last month said it was ‘broken’, while indicating any changes were not an immediate priority.

Many graduates on Plan 2 loans, taken out between 2012 and 2022, say interest is accruing faster than they can pay it off.

The average student loan balance for those who studied in England now sits at £53,010, according to Student Loans Company data acquired by the BBC.

More than 2.8million graduates now have at least £50,000 of outstanding student debt, up from more than 2.6million graduates in August 2025.

More than 5.3million student loans have grown since the borrowers passed their loans’ repayment threshold and started repaying them, according to Compare the Market. This is because interest is being added to graduates’ loans faster than they can pay it off.

One unlucky graduate owes the Student Loans Company (SLC) £314,356, more than the average house price in the UK.

Still an unfair system?

Critics have pointed out that, even with the 6 per cent cap, those on Plan 2 and 3 loans will still be worse off than other graduates. 

Tom Allingham, student loans expert at campaign group Save the Student said that while the cap gives some clarity to graduates and students, those who took out different plans still have better interest rates. 

He said: ‘As things stand, the other two student loan plans operating in England 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.’

Ian Futcher, financial planner at wealth manager Quilter, added: ‘The interest rate cap may dominate the headlines, but it does little to change the financial reality graduates are living with. 

‘The real pressure point is the frozen repayment threshold, which is pulling more people into repayments earlier, as wages rise but still struggle to keep up with rising costs.’