Student loans have been under scrutiny (Image: Su Arslanoglu via Getty Images)
Interest rates on Plan 2 student loans are set to be capped at six percent, yet experts warn it’s “a plaster on an already festering wound”. The Government is capping the maximum interest rates on Plan 2 and 3 student loans at six per cent from September 1, for the 2026/27 academic year, it has been announced.
This measure will shield students and graduates in England and Wales from the potential impact of inflation pressures arising from the conflict in the Middle East. The reform eliminates the risk of any temporary surge in inflation, causing loan balances to compound at an unsustainable rate.
Graduates with Plan 2 loans currently pay interest rates of between Retail Prices Index (RPI) and RPI plus three per cent, depending on their earnings. Current students on Plan 2 and Plan 3 also attract an interest rate of RPI plus three per cent while they are studying. Interest on Plan 2 and 3 student loans will be capped at six per cent instead of RPI plus three per cent to safeguard borrowers, the Government confirmed.
This will ensure no Plan 2 or Plan 3 borrower faces an interest rate above six per cent, protecting them from any short-term rise in RPI due to global shocks, such as temporary spikes in oil prices. The repayment threshold for Plan 2 loans was increased to £28,470 in April 2025 – its first increase since 2021 – and was raised again on April 6 this year, to £29,385.
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.”
Rates have been capped (Image: Pexels)
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Antonia Medlicott, founder and MD at London-based Investing Insiders, argued that the move “does not address the underlying” problem with the loans.
She went on to say: “While this is welcome news for everyone already in the system, the cap feels like a plaster on an already festering wound. Capping at six percent is, in effect, an acknowledgement that there are issues in the way the interest rate on this loan is currently administered. But this is a short-term intervention and does not address the underlying reality of the loan in its current format.
“While the change will help limit how quickly the headline balance will inflate, many borrowers will still see their balance grow despite making repayments. If the goal is to make the system fairer and more transparent, this does not go far enough. It is a short-term fix to a long-term structural problem.”
Loans can take decades to pay off (Image: andresr via Getty Images)
Michelle Lawson, director at Fareham-based Lawson Financial, echoed these sentiments, insisting the measures fell well short of what was needed.
She added: “This will benefit new loans in the new academic year, but the students feeling the most pain are those already in the system. Capping this from September is a start, but it isn’t far enough.
“What happens with the upcoming five months due to the Middle East crisis and the spiralling debt to date. Most students owe significantly more than they have borrowed, with monthly repayments not touching the interest payments let alone the balance.”
Graham Nicoll, financial planner and Chartered FCSI at NCL Wealth Partners, argued that the student loan system was in dire need of simplification.
He added: “This is a helpful short-term safeguard that limits volatility and gives borrowers more certainty. Although it does not go far enough as six per cent 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. High interest rates combined with long repayment terms mean many graduates view the loan more like a graduate tax than a conventional debt. Longer-term reform should focus on simplifying the system, improving transparency and reconsidering whether interest should play such a large role at all, particularly given the public benefit of higher education.”
