RPI vs CPI: Why Your Student Loan Interest Outpaces Inflation
Your student loan interest is tied to RPI, but when the calculator shows “adjusted for inflation,” it uses CPI. RPI typically runs 0.5–1% higher. That gap means your balance grows faster than the general cost of living.
What Are RPI and CPI?
- RPI (Retail Prices Index): includes housing costs such as mortgage interest and council tax. The Student Loans Company uses RPI to set loan interest rates. Currently 3.2%.
- CPI (Consumer Prices Index): the Bank of England's target measure with a 2% target. Excludes housing costs. This is what the calculator's “Adjust for inflation” toggle uses.
- CPIH (CPI including Housing): the ONS's preferred headline measure since 2017. Not used for student loans.
The government stopped using RPI for most purposes because it overstates inflation, but student loans remain tied to it.
Why Student Loans Use RPI
Plan 2 was introduced in 2012 when RPI was still widely used across government policy. The government has since acknowledged that RPI overstates inflation due to the “formula effect” — it uses an arithmetic mean rather than a geometric mean, which systematically produces higher figures.
Plans exist to align RPI with CPIH by 2030, but current loan terms are unlikely to change retroactively. Each plan uses RPI in its interest formula:
- Plan 5: RPI only (3.2%)
- Plan 2: RPI to RPI + 3% (3.2% – 6.2%) depending on income
- Plan 1 & 4: lesser of RPI or base rate + 1% (currently 3.2%)
- Postgraduate: RPI + 3% (6.2%)
The Gap Between RPI and CPI
RPI historically exceeds CPI by roughly 0.5–1 percentage points. With RPI at 3.2% and the CPI target at 2%, the current gap is 1.2 percentage points.
Two factors drive the gap: RPI includes housing costs that CPI excludes, and RPI uses an arithmetic mean formula while CPI uses a geometric mean. The arithmetic mean always produces a higher result when prices are changing, which is why statisticians call it the “formula effect.”
The chart below shows what this gap looks like over the life of a Plan 5 loan.
Inflation Comparison
Plan 5, £45,000 balance. The gap between the CPI-adjusted and RPI-adjusted lines is the real above-inflation cost.
Nominal, CPI-Adjusted, and RPI-Adjusted: Three Ways to See Your Loan
- Nominal: the raw balance on your SLC account. Grows at the loan interest rate.
- CPI-adjusted: discounted by CPI — this is what the calculator's “Adjust for inflation” toggle shows. It tells you what the balance is worth in today's money.
- RPI-adjusted: discounted by RPI. The balance appears roughly flat because RPI is close to the interest rate itself. But this is misleading because RPI overstates general inflation.
The key insight: the gap between the CPI-adjusted and RPI-adjusted lines is the real above-inflation cost of the loan.
What This Means for Your Plan
- Plan 5: “RPI only” sounds gentle, but since RPI runs higher than CPI, the loan still grows faster than general prices.
- Plan 2: the sliding scale starts at RPI (already above CPI). High earners face RPI + 3%.
- Plan 1 & 4: capped at the lesser of RPI or base rate + 1%, so these borrowers are somewhat shielded.
- Postgraduate: RPI + 3% means the largest gap above CPI of any plan.
Key Takeaways
- RPI typically runs 0.5–1% higher than CPI — your loan interest is tied to the higher measure.
- “Adjusted for inflation” in the calculator uses CPI, not RPI. Remaining growth after toggling is real above-inflation cost.
- Plan 5's “inflation-only” interest is RPI-inflation, not CPI-inflation.
- RPI may align with CPIH by 2030, but current borrowers are unlikely to benefit.