UK to cap student loan interest rates at 6 per cent from September 2026

THE UK government said on Tuesday it would cap interest rates on millions of student loans at 6 per cent from September 2026, citing risks of rising inflation linked to conflict in the Middle East that could increase borrowing costs for graduates.

The student loan system in England and Wales has faced criticism, and prime minister Keir Starmer said in February he would look at ways to make it fairer.

The government has also faced criticism from some lawmakers, including members of his own Labour Party, over interest charges and repayment conditions.

The Department for Education said the cap on plan 2 and plan 3 student loans would apply for the 2026/27 academic year. This will override the current formula that links interest rates to inflation and allows charges of up to the Retail Prices Index plus 3 percentage points.

The government said the move was needed to protect borrowers from temporary inflation increases caused by global shocks and that graduates should not face higher debt costs due to the war.

"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 Jacqui Smith, the skills minister in the Department for Education.

She said the government would continue to look at what she called the "broken" plan 2 system to make it fairer.

Most criticism has focused 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 people.

Tuition fees are capped at 9,535 pounds in England and Wales in the current academic year.

Graduates with plan 2 loans currently pay interest ranging from RPI to RPI plus 3 per cent, depending on earnings. Students on plans 2 and 3 accrue interest at RPI plus 3 per cent while studying.

If not repaid after 30 years, the debt is cancelled.

(With inputs from agencies)