Student loans and interest rates: FAQs

What are the different student loan repayment plans?

There are five student loan repayment plans for UK borrowers. A borrower’s repayment plan is determined by where they lived when they took out their loan, when they started their course, and what type of course they studied.

• Plan 1 loans are those taken out between August 1998 and September 2012 by borrowers in England and Wales. All borrowers in Northern Ireland are also on plan 1.
• Plan 2 loans are those taken out for undergraduate courses and Postgraduate Certificates of Education (PGCE) since 1 September 2012 in Wales and between 1 September 2012 and 31 July 2023 in England.
• Postgraduate/plan 3 loans are those taken out for master’s or doctoral courses by borrowers in England and Wales.
• Plan 4 loans are for all borrowers in Scotland.
• Plan 5 loans are for undergraduate and PGCE courses started by borrowers in England after 1 August 2023.

Each student loan repayment plan will have different terms and conditions for borrowers, including with regards to interest rates.

How are student loan interest rates calculated?

The current interest rates for each repayment plan, and how they are calculated, is set out on gov.uk.

Interest rates are generally set on 1 September each year, using the Retail Prices Index (RPI) of the previous March. RPI is a measure of inflation that tracks changes to the cost of living in the UK. For the period 1 September 2024 to 31 August 2025, the applicable rate of RPI is 4.3%.

Plans 1 and 4 may use the bank base rate, which is the official interest rate set by the Bank of England, instead of RPI. For plans 2, 3, and 5, rates are subject to caps to reflect the “Prevailing Market Rate” (see below for more information). This means rates may change during the year.

The table below sets out how interest for each repayment plan is calculated, as well as the current rate as at May 2025.

Why do some people pay a higher interest rate on their student loan than others?

The interest rates for plan 2 and 3 loans are higher than for other plans because they include a “real interest rate” of up to 3%. This is added to the loan on top of the rate of RPI inflation. In contrast, the maximum interest rate on plan 5 loans is set at RPI inflation only, while for plan 1 and 4 loans it is the lower of either RPI or the bank rate plus 1%.

The addition of a real interest rate is intended to make the funding system more progressive, so higher earners make more of a contribution to the costs of higher education than lower earners. This practice was adopted for plan 2 loans following a review of higher education funding in 2010, known as the Browne Review. This review recommended graduates should pay for their higher education in proportion to the financial benefit they have received. Charging a real interest rate on loans also reduces the public subsidy for higher education from the taxpayer, making the student loans system cheaper than it would otherwise be for the government.

As part of a subsequent review of higher education between 2018 and 2022, the Augar report recommended that real interest rates should be removed during a borrower’s period of study but retained for when they were earning. On concluding the review, however, the then-Conservative government chose to remove the real interest rate for new plan 5 student loans altogether. It also made several other reforms to student loan repayment terms, which will see more borrowers repay their loans in full under plan 5.

Do interest rates affect how much a borrower repays?

Interest rates on student loans affect only a borrower’s total loan balance. They do not affect how much a borrower must repay each month. Repayment amounts are instead determined by a borrower’s loan plan, their salary, and the country where they live.

For example, plan 2 borrowers living in the UK repay 9% of everything they earn above the current annual salary repayment threshold of £28,470. Monthly repayments pause if a borrower’s salary drops below that threshold and stop after 30 years, with any remaining loan balance written off.

Set at RPI only, the interest rate for plan 5 loans is lower than for plan 2 loans. This means total loan balances will be lower for plan 5 borrowers, who will not pay back more than they borrow in real terms. However, plan 5 loans have a longer repayment period and lower salary repayment threshold compared to plan 2 loans (40 years and £25,000 for plan 5 and 30 years and £28,470 for plan 2). This will result in higher total repayments for lower earning graduates and lower total repayments for those who earn the most. See analysis by the Institute for Fiscal Studies and the Commons Library for more information.

Why might student loan balances increase despite regular repayments?

Student loan balances are determined by the amount of money borrowed, any interest accrued, and how much a borrower repays.

Interest is charged from the day of the first payment made by the Student Loans Company and is added to the loan balance each month. Monthly repayment amounts are determined by a borrower’s annual salary. No repayments are made when a borrower is not working or earning below the relevant salary threshold.

If the monthly interest accrued on a student loan is greater than the monthly repayment amount, a borrower’s loan balance will increase, but it is important to remember a borrower’s loan balance will be cancelled in full at the end of their repayment period.

Are student loan interest rates capped?

The Department for Education and Welsh Government review student loan interest rates monthly against the interest rates prevailing on the market for comparable loans. If necessary, they cap rates for plan 2, 3, and 5 loans for the duration of the calendar month to reflect the “Prevailing Market Rate”.

Between 1 September 2023 and 31 August 2024, for example, the applicable rate of RPI was 13.5%, which meant the maximum interest rate for plan 2 and 3 loans would have been 16.5%. Instead, rates were initially capped at 7.3% before this increased over the next twelve months to reach 8%. See section 4 of the Commons Library research briefing Student loan statistics for more information.

What has the government said about interest rates?

In response to parliamentary questions about interest rates, the current Labour government has said:

Student loans are subject to interest to ensure that those who can afford to do so contribute to the full cost of their degree. The government does not make a profit from the student loan repayment system.

The government has also said it believes that since graduates can expect to earn, on average, more in their lifetimes than those who do not attend higher education, “it is reasonable to ask graduates who benefit financially from HE [higher education] to contribute towards the cost of their studies.”

The government has also highlighted that interest rates do not affect monthly repayments, as well as other protections unique to student loans. These include the fact borrowers only make repayments when earning above the relevant salary threshold and any outstanding debt, including accrued interest, is written off when the loan term ends or in case of death or disability.

The government has said it will publish a plan for reforming higher education in summer 2025, but it is unclear if this will include making changes to student loan repayment terms.

Further information

The following Commons Library research briefings may be of interest:

• Student loan statistics provides more information on current and historic interest rate levels.
• Tuition fees in England: History, debates, and international comparisons explains how the student financial contribution to higher education has evolved over time.
• The Post-18 Education and Funding Review: Government conclusion explains the most recent review of student loans that brought about the current system of plan 5 loans in England.