Interest rate on student loans to be capped at 6% for one year as inflation fears rise
The government is capping the interest rate on contentious Plan 2 student loans for the 2026/27 academic year in a bid to protect students from the ongoing conflict in the Middle East which could drive inflation higher
The government has capped the maximum interest rate on Plan 2 and 3 student loans for the 2026/27 academic year amid the conflict in the Middle East.
The Department for Education (DfE) has confirmed the interest rate applied on these loans will be set at 6% instead of Retail Price Index (RPI) + 3% to shield graduates from rising inflation.
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Jacqui Smith, the minister for skills, 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.”
Why is the government capping interest rates on Plan 2 and 3 student loans?
The cap has been put in place amid fears that inflation could spike in the coming months following the ongoing US-Iran conflict. Without the cap, there is a risk students could pay significantly higher rates.
Currently, interest is added to Plan 2 student loans at RPI + 3% while you are studying and then applied on a sliding scale of between RPI and RPI + 3% after you have graduated and your income is between repayment thresholds of £29,385 and £52,884.
Plan 3 student loans apply to students carrying out a postgraduate qualification like a Master’s or PhD. Interest on these loans is charged at RPI + 3%.
The interest rate for Plan 2 and 3 student loans is set on 1 September using the RPI figure from the previous March. For the 2025/26 academic year, this rate is 3.2% (RPI for March 2025) + 3% – 6.2%.
The RPI figure for March 2026 will be released by the Office for National Statistics (ONS) on 22 April 2026, with concerns it could rise from 3.6% in February due to the inflationary impact of the conflict in the Middle East.
The Strait of Hormuz, a body of water south of Iran and major shipping channel for oil, gas and fertiliser, is effectively closed due to the conflict, which is pushing up wholesale prices.
These increased costs could push up the price of food in the UK. In March, the National Farmers’ Union (NFU) warned of food inflation if tensions in the Middle East continue.
Last week, the Food and Drink Federation (FDF), which represents the food manufacturing sector, has forecast food inflation to reach over 9% by the end of 2026.
Should RPI rise in March, and without government intervention, students on Plan 2 and 3 loans would be facing interest rates of around 7% from September.
Ian Futcher, financial planner at wealth manager Quilter, said the 6% cap offered “reassurance but not relief”, with the repayment threshold for those on Plan 2 loans frozen at £29,385 until 2030.
Futcher said: “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.
"For lower earners, that means student loans increasingly bite at the same time as rent, energy bills and everyday living costs remain stubbornly high. Add in record house prices and larger deposits, and many graduates are finding their disposable income squeezed from multiple directions before they have even had a chance to build any financial resilience.
"For middle and higher earners, the challenge is different. They are more likely to repay their loans in full, so capping interest can reduce the final bill, but long repayment periods still drain cash that could otherwise go towards saving for a home, building investments or paying into a pension.”
Government launching enquiry into student loans
The announcement from the government comes after MPs launched an inquiry into the fairness of student loans.
Students now leave university with more than £50,000 in student loan debt, according to the Institute for Fiscal Studies (IFS).
Higher interest rates on loans are seeing some students’ debt pile higher and higher as they struggle to keep up with repayments, some unable to pay off just the interest each month.
The inquiry will look at the fairness of all student loans with a particular focus on Plan 2 loans, due to the higher interest rates charged on them versus Plan 1 and Plan 5 loans.
