Student loan interest rates capped at six per cent amid Iran war

The government will cap interest rates on Plan 2 and Plan 3 English and Welsh student loans at 6 per cent from September to protect against potential repayment hikes as a result of the conflict in the Middle East. 

Currently, interest rates on student loans are linked to the Retail Prices Index (RPI), with higher earners paying up to 3 per cent on top of this. 

Student loan interest rates are set at a fixed rate each academic year based on the RPI value for the year to March prior – in this case, March 2026. 

March’s RPI has not yet been announced, but was 3.6 per cent in February 2026, down from 3.8 per cent in January.

The government said capping the interest amount at 6 per cent from 1 September would “protect” students and graduates “from the potential of inflation pressures due to the situation in the Middle East”. 

“This reform removes the risk of any temporary increase in inflation causing loan balances to compound at an unsustainable rate and is in line with actions taken in the past to secure stability in the student finance system,” it said in a statement. 

The government has been under increasing pressure to reform student finance repayments as many graduates face growing levels of debt, exacerbated by the decision to freeze the repayment threshold from 2027. 

Prime minister Keir Starmer said in February the government was looking at ways to make the system fairer after being grilled on the situation by MPs.

However, no changes have been made until now, with chancellor Rachel Reeves claiming in March that reforming the system was not a priority for the government. 

Commenting on the latest announcement, minister for skills Jacqui Smith said: “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.”

She added that the government is “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”.

“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,” Smith said. 

Amira Campbell, president of the National Union of Students, described the news as “a huge win” but said the 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. We still need to see the chancellor stick by the terms we signed at 17 years old, and raise the threshold in line with our incomes.”

Tom Allingham, student loans expert at Save the Student, said the news would give students and graduates “some clarity” but said there were still questions that needed answering.

He added that those on Plan 1 and Plan 5 loans will continue to be charged a much lower interest rate. 

“Amid the ongoing student loan inquiry and growing cries from students and graduates for reform, we’re calling on the government to announce far more substantial changes that create a truly fair system.”

helen.packer@timeshighereducation.com