A new government cap on student-loan interest rates has taken effect today, ensuring that borrowers with Plan 2 and Plan 3 loans will not face interest rates above 6% during the 2026/27 academic year.
The measure applies from 1 September 2026 and prevents the normal interest formula from pushing rates beyond the new ceiling if inflation rises sharply.
The Department for Education announced the intervention earlier this year, saying it was designed to protect students and graduates in England and Wales from potential inflationary pressures associated with the conflict in the Middle East and other global shocks.
Plan 2 and Plan 3 interest capped at 6%
Plan 2 undergraduate loans can normally attract interest of up to Retail Price Index inflation plus three percentage points, depending on a borrower's circumstances and income after leaving university.
Plan 3 postgraduate loans also normally use an RPI plus 3% interest formula.
Under the new policy, however, neither Plan 2 nor Plan 3 borrowers will face an interest rate above 6% during the academic year running from 1 September 2026 to 31 August 2027.
The Government says the measure removes the risk that a temporary increase in RPI caused by international events could lead to loan balances compounding at what it described as an unsustainable rate.
Government cites Middle East inflation risks
When announcing the policy in April, ministers directly linked the decision to uncertainty created by conflict in the Middle East.
The Department for Education said students and graduates should be protected from inflationary pressures arising from a conflict in which the UK has no direct involvement.
It specifically identified temporary spikes in oil prices as the type of global shock that could feed into RPI and consequently increase student-loan interest rates.
Skills Minister Jacqui Smith said the Government was acting to protect borrowers from consequences outside their control while continuing to examine the wider student-finance system.
What does the cap mean for borrowers?
The 6% figure is a maximum rather than a flat interest rate that every affected borrower will automatically pay.
Plan 2 interest varies according to a borrower's circumstances and, after leaving a course, their income. Borrowers whose calculated rate falls below the cap will continue to pay the lower applicable rate.
The practical effect of the policy is therefore to prevent any Plan 2 or Plan 3 rate that would otherwise exceed 6% from doing so during the 2026/27 academic year.
The cap also does not directly reduce the amount deducted from a graduate's salary each month. Income-contingent repayments are calculated using earnings and the relevant repayment threshold rather than the interest rate charged on the outstanding balance.
Plan 2 repayment threshold now £29,385
The Government has also increased the Plan 2 repayment threshold to £29,385 from 6 April 2026.
Plan 2 borrowers repay 9% of relevant earnings above their repayment threshold, while Plan 3 postgraduate borrowers repay 6% of earnings above the applicable postgraduate threshold.
Someone holding both an undergraduate Plan 2 loan and a Plan 3 postgraduate loan can therefore make repayments towards both loans at the same time.
The Department for Education's student-loan forecasts confirm that the 6% interest cap for both Plan 2 and Plan 3 has been incorporated into its assumptions for the 2026/27 academic year.
Who has a Plan 2 loan?
Plan 2 broadly covers English undergraduate borrowers who started courses between September 2012 and July 2023, although individual circumstances can vary.
Plan 3 covers postgraduate Master's and Doctoral loans in England and Wales.
The new 6% ceiling does not mean that every student-loan plan has been moved onto the same interest regime. Other repayment plans operate under different rules.
Cap runs for the academic year
Student-loan interest rates are set by academic year, running from 1 September to 31 August, using the relevant RPI figure from the preceding March.
The Government announced the 6% ceiling before rates for 2026/27 were finalised in order to provide borrowers with certainty over the maximum they could face.
The cap will remain in place throughout the 2026/27 academic year, preventing Plan 2 and Plan 3 interest from rising beyond 6% even if the normal formula would produce a higher figure.