From 1 March 2023 to 31 May 2023, the maximum interest rate on both types of loan will be 6.9%. Then from 1 June to 31 August 2023, the maximum Plan 2 and the PGL interest rate will be capped at the forecast “prevailing market rate” for the 2022/23 academic year.

This figure is 7.3%, in line with a government announcement in June 2022. Should the actual prevailing market rate turn out to be lower than forecast, a further cap would be implemented to reduce student loan interest rates accordingly.

The new rates are a rise from the current maximum interest rate of 6.5% for those with Plan 2 or Postgraduate loans. This rate has been in place since 1 December 2022 but it will end on 28 February 2023. Before that, from 1 September 2022 to 30 November 2022, the maximum Plan 2 and the Postgraduate loan (PGL) interest rate was set at 6.3%.

The government says the rates are in line with the “prevailing market rates”. But the prevailing market rate is not defined in law, nor does any product on the market offer a direct “market rate” comparison to student loans.

The government says the most appropriate market rate comparators for student loans are the effective interest rates available on unsecured personal loans. To determine the “prevailing” market rate, a 12-month rolling average is taken.

If the government considers that the student loan interest rate is too high in comparison to the prevailing market rate, it will reduce the maximum Plan 2 and Postgraduate Loan interest rate by applying a cap for a set period of three months (or longer, if the prevailing market rate remains below the student loan rate at the next monitoring point).

How will the new rates affect payments?

The rate rises won’t make a difference to monthly loan repayments as Plan 2 borrowers will continue to repay 9% of their earnings over the repayment threshold. The repayment threshold for Plan 2 ICR (income-contingent repayment) loans is £27,295 for 2022/23.

Plan 2 ICR loans are those loans taken out for a course starting after 1 September 2012 in England and Wales.

Postgraduate loan borrowers will continue to repay 6% of their earnings over the repayment threshold. The repayment threshold for Postgraduate loans is £21,000 for 2022/23.

Plan 1 ICR loans, those loans taken out for a course starting before 1 September 2012, are not affected.