Student loan interest rates for Plan 2 and Plan 3 borrowers will be capped at 6% from September, the government has announced, following widespread criticism over the escalating cost of repayments.
The move aims to provide stability and protection for graduates facing increased financial pressures, partly attributed to the ongoing conflict in the Middle East.
Currently, interest on Plan 2 loans varies between the Retail Price Index (RPI) inflation rate and RPI plus 3%, which presently stands at 6.2%, depending on a graduate's earnings.
Students on both Plan 2 and Plan 3 loans also face an RPI plus 3% interest rate while they are studying. From 1 September, the Department for Education confirmed the cap will replace the RPI plus 3% rate for these loans.
Plan 2 loans apply to undergraduate courses and Postgraduate Certificates of Education taken out in Wales since September 2012, and in England between September 2012 and July 2023. Plan 3 loans cover postgraduate master's or doctoral courses for students in England and Wales.
The decision comes after Chancellor Rachel Reeves faced significant pressure to reform Plan 2 loans, particularly following her budget last year where she froze the salary threshold at £29,385 for three years from April.
While initially defending the student loans system as "fair”, she later conceded it was "broken" last month, though she indicated immediate changes were not a priority.
Skills minister Jacqui Smith stated the government is "continuing to look at the broken plan 2 system we inherited" more broadly.
She added: "We know that the conflict in the Middle East is causing anxiety at home, and while the risk of global shocks is beyond our control, protecting people here is not."
Ms Smith emphasised that "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."
She concluded by highlighting broader reforms, including "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."
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