UK Government Caps Student Loan Interest at 6% to Shield Graduates From Inflation

The UK government confirmed it is capping Plan 2 and postgraduate student loan interest rates at 6% from 1 September 2026, invoking geopolitical risk as its rationale: concerns that the Middle East conflict could drive oil prices higher and push inflation above the point where the existing loan formula becomes untenable.

Without the cap, the rate for the 2026/27 academic year would sit at 6.2%, derived from the standard Plan 2 formula of the Retail Price Index plus up to 3%. March 2025's RPI reading of 3.2% sets that baseline, meaning the uncapped figure would exceed what most borrowers currently pay on their mortgages.

The government's official position was direct: "Graduates will not pay the price for a war which the UK has no direct involvement in." Ministers also stated the reform "removes the risk of any temporary increase in inflation causing loan balances to compound at an unsustainable rate," and acknowledged that Plan 2 borrowers are "most exposed within this already unfair system."

Plan 2 loans cover undergraduate courses that began after 1 September 2012 and apply to borrowers in England and Wales. The standard formula charges RPI plus 3% during study, with post-graduation rates tiered between RPI and RPI+3% depending on earnings; those earning below £28,470 per year pay the lower RPI-only rate. The repayment threshold rises to £29,376 per year from April 2026. Plan 3, the postgraduate loan product, falls under the same cap.

The intervention has direct precedent. During the high-inflation period of late 2022 and into 2023, the government twice imposed emergency limits: first at 6.5% between 1 December 2022 and 28 February 2023, then at 7.3% between 1 March and 31 August 2023. The Department for Education described the current move as "in line with actions taken in the past to secure stability."

The contrast with newer and older loan products sharpens the case for intervention. Plan 5 loans, which apply to undergraduates who began courses from 2023/24 onward, carry a rate of just 3.2%, identical to the rate on pre-2012 Plan 1 loans. Even with the 6% ceiling applied, Plan 2 borrowers will pay nearly double that rate through the coming academic year.

Martin Lewis, the consumer finance commentator and founder of MoneySavingExpert, has long argued against above-inflation interest on Plan 2 loans, citing both financial and psychological harm to borrowers. MoneySavingExpert's guidance characterised the uncapped 6.2% rate as "higher than many mortgages, and higher than for students from prior cohorts."

The legal authority for the cap rests in section 22(4) of the Teaching and Higher Education Act 1998, which requires the Secretary of State to ensure student loan interest rates do not exceed the prevailing market rate. Rates are set each 1 September based on the prior March RPI figure and administered by the Student Loans Company, which has no independent power to adjust them. Whether inflationary pressure from oil markets subsides before September will determine whether the government treats the 6% ceiling as a one-year measure or extends it further.