Plan 2 Interest Rate Capped at 6%: What It Means for You

Plan 2 loans charge interest on a sliding scale: from RPI (currently 3.2%) for lower earners up to RPI + 3% (currently 6.2%) for those earning above £51,245. While studying, borrowers are charged the full RPI + 3%.

From 1 September 2026, the maximum interest rate on Plan 2 and Plan 3 loans will be capped at 6%, regardless of what the RPI + 3% formula produces. This cap applies for the 2026/27 academic year.

At current rates, this barely bites — the maximum is 6.2%, only 0.20000000000000018% above the cap. But the cap is designed as insurance: if inflation surges again, your interest rate will not follow it above 6%.

Skills Minister Jacqui Smith cited the risk of inflation pressures from Middle East conflicts and global instability. When RPI spikes, the RPI + 3% formula can push interest rates well into double digits — exactly what happened in 2022–2024.

The government had previously used the “prevailing market rate” (PMR) mechanism to intervene when rates became unreasonable. The 6% cap formalises this protection with a clear, predictable ceiling instead of ad-hoc adjustments.

The real impact of the cap depends on future inflation. At current RPI (3.2%), the difference is small. But if inflation returns to levels seen in 2022–2023, the cap prevents your balance from compounding at extreme rates.

The chart below starts at today's RPI (3.2%), where the two lines nearly overlap. Try selecting 7% or 9% to see why the cap was introduced — at those levels the gap between capped and uncapped balances becomes dramatic. The scenario assumes a £45,000 loan, a £35,000 starting salary, and 3% annual growth.

Because Plan 2 loans are written off after 30 years regardless of the remaining balance, most borrowers will not repay in full. The cap matters most for middle-to-high earners who do repay everything — they accumulate less interest, so their total bill is lower.

The chart below compares total repayment across salary levels, assuming a sustained 7% RPI scenario. Lower earners see little difference because their loans are written off either way. Higher earners see meaningful savings.

• Current students on Plan 2 or Plan 3 — while studying, you are charged the maximum rate (RPI + 3%). The cap means this will not exceed 6%, slowing the growth of your balance before you even start repaying.
• Higher earners with large balances — if you earn above £51,245, you are on the maximum rate. The cap gives you the biggest absolute reduction in interest.
• Graduates who will repay in full — if your salary is high enough to clear the loan before the 30-year write-off, lower interest means a lower total cost.

Lower earners who will never repay in full are less directly affected — the cap reduces the balance that eventually gets written off, but does not change their monthly repayments (which are based purely on income).

• Monthly repayments are unchanged — you still repay 9% of income above the threshold (£28,464/year). The cap only affects how fast your balance grows.
• Plan 1, 4, and 5 are not affected — Plan 1 and 4 rates are already capped at the lower of RPI or Bank of England base rate + 1%. Plan 5 charges RPI only, with no +3% component.
• The cap is for 2026/27 only — it has been announced for one academic year. Whether it becomes permanent depends on future policy decisions.