How Interest Works on UK Student Loans
Interest is one of the most confusing parts of student loans. Each plan type calculates it differently, which means the amount your balance grows varies depending on when you started university and how much you earn.
Plan 2: The Sliding Scale
Plan 2 has the most complex interest calculation. It uses a sliding scale tied to your income, ranging from RPI (currently 3.2%) up to RPI + 3% (currently 6.2%).
- Earning below the lower threshold of £28,470: you pay RPI only (3.2%)
- Earning above the upper threshold of £51,245: you pay the maximum of RPI + 3% (6.2%)
- Earning between the two: the rate scales linearly from 3.2% up to 6.2%
While studying, Plan 2 borrowers are charged the maximum rate of RPI + 3%. This means your balance starts growing before you even graduate.
Plan 5: RPI Only
Plan 5, introduced for students starting from September 2023, has a much simpler formula. Regardless of how much you earn, the interest rate is just RPI — currently 3.2%.
This is a significant change from Plan 2. A high earner on Plan 2 could be paying 6.2% interest, while the same earner on Plan 5 would pay only 3.2%. The chart below illustrates this difference clearly.
Plan 1 and Plan 4
Plan 1 (England, Wales & Northern Ireland pre-2012) and Plan 4 (Scotland) use the same interest formula: the lesser of RPI or the Bank of England base rate plus 1%.
With RPI at 3.2% and the base rate at 3.75%, the current interest rate for these plans is 3.2% (the lower of 3.2% and 4.75%).
Postgraduate Loans
Postgraduate (Master's and Doctoral) loans always charge RPI + 3%, regardless of your income. At current rates, that means 6.2% interest per year — the highest rate of any UK student loan plan.
Why Your Balance Grows
Many graduates are surprised to see their loan balance increase despite making repayments. This happens when the interest added each month exceeds what you repay.
For example, on a £45,000 balance at 6.2% interest, you would accrue roughly £233 per month in interest alone. If your monthly repayment is less than that, the balance will keep growing.
This is most common early in your career when salaries are lower and balances are at their highest. Over time, salary growth increases your repayments while the balance (hopefully) shrinks, eventually tipping the scales.