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Student loan interest rates capped

Paloma Kubiak
Written By:
Paloma Kubiak

The student loan interest rate for current graduate borrowers will be cut to 7.3% from the eyewatering 12% which was expected to apply from September.

The Retail Price Index (RPI) measure of inflation each March is used to calculate interest on student loans for Plan 2 (undergraduates) and Plan 3 (postgraduates) borrowers.

This is for those students in England and Wales who took out a loan for a course starting on or after 1 September 2012 and currently stands at 4.5%.

It’s usually the RPI plus up to 3% so given March’s 9% figure, it means these borrowers faced an eyewatering 12% interest rate in September.

Confirmation on interest rates is usually made in August, but the government has taken “unprecedented steps to bring the decision forward”, based on predicted rates “to provide reassurance for student loan borrowers”.

It means the interest rates will be capped to a maximum of 7.3% to protect graduates.

The Department for Education said this is the “largest scale reduction of student loan interest rates on record”. It added that for a borrower with a student loan balance of £45,000 would reduce their accumulating interest by around £180 per month compared to 12% interest rates.

However, the interest rate on student loans has no impact on monthly repayments which will not increase for students. This is because repayments are linked to income, not interest rates.

Interest rates only affect lifetime repayments for those who will repay their loans in full, or who come very close to doing so, high earners and those with small loan balances. See the government’s repaying your student loan guide for further information.

Higher and further education minister, Michelle Donelan, said: “The government has always been clear that where it can help with rising prices we will, and I will always strive for a fair deal for students, which is why we have reduced the interest rate on student loans down from an expected 12%.

“I want to provide reassurance that this does not change the monthly repayment amount for borrowers, and we have brought forward this announcement to provide greater clarity and peace of mind for graduates at this time.

“For those starting higher education in September 2023 and any students considering that next step at the moment, we have cut future interest rates so that no new graduate will ever again have to pay back more than they have borrowed in real terms.”

In February, the government announced big changes to the loan system for new students. See YourMoney.com’s Student loan shake-up: Graduates could end up paying more for more information.