On Tuesday, the Department for Education announced it would cap interest rates on Plan 2 and Plan 3 student loans at 6 per cent from 1 September, citing the risk that conflict in the Middle East could drive a spike in inflation and push loan balances to compound at an unsustainable rate.
Who it affects
Plan 2 loans were taken out by students who began university between September 2012 and July 2023, and are currently held by an estimated 5.8 million people. Plan 3 covers postgraduate borrowers. If you fall into either group, this announcement is directly relevant to you.
Under the existing formula, graduates with Plan 2 loans pay interest ranging from Retail Price Index (RPI) to RPI plus 3 per cent, depending on earnings, while current students accrue interest at RPI plus 3 per cent while studying. With RPI coming in at 3.6 per cent in February 2026, and geopolitical pressures likely pushing the March figure higher, the uncapped rate for higher earners was heading comfortably above 6 per cent. The cap closes that gap before it opens.
What actually changes
The practical effect is modest for most borrowers right now. Plan 2 interest already ranges from 3.2 per cent to 6.2 per cent, depending on income for the current academic year, so the cap primarily protects higher earners from a rate that might otherwise have exceeded 6 per cent next September. For lower earners, whose rate tracks RPI alone, the cap is largely academic.
What the announcement does not address is the structural direction of travel. The Plan 2 repayment threshold will be frozen at £29,385 from April 2027 until April 2030, meaning it will not rise with inflation for four years, pulling more graduates into repayment as wages grow but the threshold does not. On a £35,000 salary, that works out to roughly £80 to £250 more per year by the end of the freeze period.
Tuition fees are also rising to £9,790 for the 2026/27 academic year, the first increase since 2017, adding approximately £2,370 to total three-year borrowing compared to the previous cap.
The Plan 5 distinction
If you started university from August 2023 onwards, you are on Plan 5, and the picture is structurally different. Plan 5 has a lower repayment threshold of £25,000, versus £28,470 for Plan 2, meaning you start paying sooner, and a 40-year write-off period rather than 30, meaning you pay for longer. The interest cap announced this week does not apply to Plan 5.
The government has presented the cap as an act of protection, shielding graduates from a war they had no part in. That is not wrong, but it is incomplete. Since 2024, the government has also reintroduced means-tested maintenance grants from the 2028/29 academic year, providing students from lower-income households with up to £1,000 in non-repayable support, a genuine improvement at the margins.
But the trajectory of the system, higher fees, a frozen threshold, and a lower-earning starting point for newer graduates, point in one direction. The cap is a pressure valve, not a structural fix. For the millions of graduates watching their loan balances accrue, the question is not whether 6 per cent is better than 7 per cent. It is whether a system that was designed to feel invisible has started to feel very visible indeed.
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