Millions of graduates will have the interest on their student loans capped at 6% from September after mounting criticism over repayment costs as the UK braces for the economic fallout from the Iran war.
Ministers said the move would help “defend against the consequences of far-away conflicts in an uncertain world” by protecting borrowers from the risk of rising inflation.
Plan 2 student loans are those taken out for undergraduate courses and Postgraduate Certificates of Education since September 1 2012 in Wales, and between September 1 2012 and July 31 2023 in England.
Interest on these loans is paid at the rate of Retail Price Index inflation (RPI) from March preceding the beginning of the academic year in September, plus up to 3% extra depending on income, meaning the current maximum is 6.2%.
RPI for March 2026 is due to be published on April 22, and was 3.6% in February.
But from September 1 this year, the interest rate for plan 2 loans will be limited to 6% in the next academic year, the Department for Education said.
Plan 3 student loans, which cover postgraduate masters or doctoral courses, will also be covered by the same cap in England.
The Welsh Government said it agrees in principle to the change, but a final decision on whether to apply the cap for Welsh borrowers will be need to be taken following the Senedd election in May.
Chancellor Rachel Reeves has faced growing calls to reform plan 2 loans in particular after her autumn budget, in which she announced the repayment threshold would be frozen at £29,385 for three years starting from April.
Last month, she said the system was “broken” but indicated any changes were not an immediate priority.
At the end of April last year, some 5.7 million graduates were still owing debt, according to statistics issued by the Student Loans Company (SLC).
Between 2024 and 2025, the percentage of the total higher education loan balance attributed to borrowers on plan 2 schemes was nearly 80%.
Skills minister Jacqui Smith said the Government is “continuing to look at the broken plan 2 system we inherited” more broadly.
“We’re acting now to defend against the consequences of far-away conflicts in an uncertain world,” she said.
“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.
“More broadly, we’re bringing back maintenance grants and continuing to look at the broken plan 2 system we inherited, and the wider student finance system, to make it fairer for students, graduates and taxpayers.”
Campaigners welcomed the move to prevent debts from snowballing but warned further action was needed to ease the burden as economists said the change would likely benefit higher earners but not those on lower incomes.
Amira Campbell, president of the National Union of Students, said: “This Government have woken up to the unfairness of student loans, and are taking action to prevent our debts from spiralling further out of control.”
She added: “But this change cannot come alone. For most graduates, the impact on their day-to-day lives is felt through the repayment thresholds, which are being frozen for three years and will get very close to the minimum wage by 2030.”
Oliver Gardner, founder of the Rethink Repayment campaign group, said the cap would “go some way” to curbing loan balance increases but “the majority of the public agree that even an interest rate of 6% is far too high for an educational loan”.
“That is why our campaign is demanding a fairer student loan system that works for young people and gives them a realistic chance of paying back what they initially borrowed rather than watching their balances soar despite making significant monthly repayments,” he said.
Tom Allingham at Save the Student, a website offering free money advice to students, said the Government had provided some clarity to graduates but that borrowers on plan 2 and 3 schemes would still be charged “significantly more” than others.
“That a cap can be introduced, and plan 2 and 3 graduates will still be charged significantly more interest than those of different generations, surely highlights the system’s deeply embedded inequalities,” he said.
The Institute for Fiscal Studies think tank said the reforms are likely to reduce the burden for higher-earning graduates but will “do nothing” for those on lower incomes who will still see their interest rate set at RPI.
“If, for example, March RPI came in at 4%, the cap might benefit the highest-earning graduates by an average of around £500 over their lifetime,” Kate Ogden, senior research economist at the think tank, said.
“It will do nothing for graduates who are lower-earning currently who will still see their interest rate set at RPI and therefore likely below the new cap.”
The Tories have pledged to limit interest in the plan 2 system, which was introduced under the Conservative-led coalition goverment of the 2010s, to RPI only.
Shadow education secretary Laura Trott said: “Labour are tinkering around the edges while graduates will still be paying interest above inflation. These proposals do not go far enough and they confirm Labour have no serious plan to stop graduates being ripped off.
“Our new deal for young people will scrap real interest on student loans. We will double apprenticeships and put an end to dead-end degrees, so young people have a real choice about their future when they leave school.”
