In a significant intervention aimed at easing the financial strain on graduates, the UK government has announced a cap on student loan interest rates at 6%, effective from September 2026. The decision comes amid concerns that global instability, particularly conflict in the Middle East, could fuel inflation and sharply increase borrowing costs.

The cap will apply to millions of borrowers under the widely used plan 2 and plan 3 student loan schemes across England and Wales for the 2026–27 academic year. It overrides the existing formula that ties interest rates to inflation, which can push rates as high as the Retail Prices Index (RPI) plus 3%.

The move follows mounting criticism of the student loan system, with lawmakers—including members of the ruling Labour Party—accusing the government of burdening graduates with inflated interest rates and unfavourable repayment terms.

Prime Minister Keir Starmer had earlier acknowledged concerns around fairness, pledging in February to explore reforms to make the system more equitable.

A system under fire

Defending the decision, the Department for Education said the cap was necessary to protect borrowers from temporary inflation spikes driven by global shocks.

“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 Skills Minister Jacqui Smith.

Smith also signaled broader reforms ahead, describing the plan 2 loan structure as “broken” and in need of urgent overhaul.

Millions affected

The bulk of criticism has centred 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 borrowers.

Currently, graduates under plan 2 repay interest ranging from RPI to RPI + 3%, depending on income levels. While studying, borrowers on both plan 2 and plan 3 are charged the maximum RPI + 3% rate.