Student Loan Interest Rates Explained
How interest is calculated on every UK student loan plan, what drives rate changes, and why interest often matters less than you think.
How Student Loan Interest Rates Are Set
UK student loan interest rates are not set by commercial banks or determined by your credit score. They are set by the government based on a formula linked to inflation and, in some cases, the Bank of England base rate. The rates are updated each year in September, using the Retail Prices Index (RPI) figure from the preceding March. This means the rate announced in September 2025 is based on the March 2025 RPI figure.
RPI is a measure of inflation that tends to run higher than CPI (Consumer Prices Index) because it includes housing costs calculated using a different methodology. The government chose RPI for student loans despite the Office for National Statistics describing it as a "very poor measure of inflation" — a decision that has attracted criticism because it inflates the interest charged to borrowers compared to what a CPI-linked rate would produce.
Understanding how rates are set helps you anticipate changes. When inflation is high (as it was in 2022–2023 when RPI exceeded 10%), student loan interest rates spike. When inflation falls, rates decrease. However, there is an important cap mechanism and different formulas for each plan type.
Current Interest Rates by Plan (2026/27)
| Plan | Interest Rate | Formula |
|---|---|---|
| Plan 1 | 3.2% | Lower of RPI (3.2%) or BoE base rate + 1% |
| Plan 2 | 3.2% – 6.2% | RPI (3.2%) to RPI + 3% (6.2%), income-based |
| Plan 4 | 3.2% | Lower of RPI (3.2%) or BoE base rate + 1% |
| Plan 5 | 3.2% | RPI only (3.2%) |
| Postgraduate | 6.2% | RPI + 3% (6.2%) |
Plan 1 and Plan 4 Interest: The "Lower Of" Rule
Plan 1 and Plan 4 benefit from a protective cap: the interest rate is the lower of RPI or the Bank of England base rate plus 1 percentage point. This means if RPI is 3.2% but the base rate is 3.75% (making base rate + 1% = 4.75%), you pay the lower figure — 3.2%. Conversely, if the base rate drops to 1% (making base rate + 1% = 2%), and RPI is 3.2%, you would pay just 2%.
This dual-cap mechanism provides genuine protection against high interest rates. During the 2022–2023 inflation spike, when RPI reached over 10%, the base rate + 1% cap limited Plan 1 and Plan 4 interest to around 5.5%, significantly below the RPI figure. Plan 2 borrowers, who do not benefit from this cap, saw rates hit the government's temporary maximum of 6.2%.
The "lower of" rule makes Plan 1 and Plan 4 the most borrower-friendly in terms of interest. Combined with smaller typical balances (particularly for Scottish Plan 4 borrowers who only borrow maintenance), the interest charges on these plans are relatively modest.
Plan 2 Interest: The Income-Based Sliding Scale
Plan 2 has the most complex interest rate structure of any UK student loan plan. The rate varies based on your income, using a sliding scale between two thresholds:
- Earning £29,385 or below: Interest rate = RPI only (currently 3.2%)
- Earning between £29,385 and £52,885: Interest rate scales linearly from RPI to RPI + 3%
- Earning £52,885 or above: Interest rate = RPI + 3% (currently 6.2%)
The formula for incomes between the thresholds is:
Rate = RPI + 3% × (Income − £29,385) ÷ (£52,885 − £29,385)
Here are some worked examples for 2026/27:
| Annual Income | Interest Rate | Interest on £50,000 Balance (Annual) |
|---|---|---|
| £25,000 | 3.2% (RPI) | £1,600 |
| £30,000 | 3.3% | £1,640 |
| £35,000 | 3.9% | £1,965 |
| £40,000 | 4.6% | £2,290 |
| £45,000 | 5.2% | £2,615 |
| £50,000 | 5.8% | £2,915 |
| £55,000 | 6.2% (max) | £3,100 |
The sliding scale means that as your income rises, your balance grows faster due to higher interest. For many Plan 2 borrowers, this creates a situation where their monthly repayments are less than the monthly interest — causing the balance to increase over time rather than decrease.
Interest During Your Course
A fact that surprises many students: interest starts accruing from the day each loan instalment is paid out, not from when you graduate or start repaying. If you are on a three-year course, the first year's loan accrues three years of interest before you even start working. For Plan 2 borrowers, the interest rate while studying is set at the maximum rate of RPI + 3%, regardless of your income (since you typically have no income as a student).
This means a student borrowing £9,790 tuition plus £9,000 maintenance in year one would accumulate approximately £3,800 in interest over three years of study alone — before making a single repayment. By graduation, a typical Plan 2 borrower with £45,000 in loans taken out would owe approximately £52,000–£55,000 including accrued interest. This is why the headline "tuition fees are £9,790 per year" understates the true cost — interest starts immediately.
Plan 5 Interest: RPI Only (Simplified)
Plan 5 simplified the interest rate structure compared to Plan 2. Instead of the complex income-based sliding scale, Plan 5 charges a flat rate of RPI only for all borrowers, regardless of income. There is no additional 3% margin. This was one of the headline changes when Plan 5 was introduced and was presented as a borrower benefit.
However, the lower interest rate does not necessarily make Plan 5 cheaper overall. The longer 40-year write-off period means you make repayments for up to 10 extra years compared to Plan 2. For many borrowers, the additional years of repayments more than offset the lower interest rate. The interest rate is only relevant if you would repay the loan in full — and for the majority of borrowers, the loan gets written off regardless. See our Plan 2 vs Plan 5 comparison.
Postgraduate Loan Interest: RPI + 3%
Postgraduate Loans charge the highest interest rate of any UK student loan plan: RPI + 3% (currently 6.2%). There is no income-based sliding scale and no "lower of" cap — it is simply the maximum rate applied to all borrowers at all income levels. Combined with the lower repayment threshold of £21,000, Postgraduate Loans are the most aggressive plan in terms of interest accumulation.
Despite the high interest rate, the maximum Postgraduate Master's Loan of £13,206 means the absolute interest charges in pounds are relatively modest compared to larger undergraduate Plan 2 balances. The interest on a £13,000 Postgraduate Loan at 6.2% is £806/year, while interest on a £50,000 Plan 2 loan at 6.2% is £3,100/year.
The Interest Rate Cap
In periods of very high inflation, the government has the power to cap student loan interest rates at a level below the formula would otherwise produce. This happened in 2022/23, when the RPI + 3% formula would have produced rates above 12% — the government temporarily capped rates at 6.2% for Plan 2 and 6.3% for Plan 1 and 4. This cap is not automatic and is applied at the government's discretion.
For borrowers, the cap provides some protection but is unpredictable — there is no guarantee the government will intervene in future high-inflation periods. The long-term trend of interest rates depends primarily on inflation, which is influenced by global economic factors largely outside the government's control.
Daily Interest Calculation
Student loan interest is not calculated monthly or annually — it is calculated daily. Each day, a small amount of interest is added to your balance based on the annual rate divided by 365. This means interest compounds daily, though the practical difference between daily and monthly compounding is minimal at these interest rate levels.
The daily calculation does matter when you make a repayment. When your employer deducts a student loan payment from your salary, it reduces your balance on that date, and all future daily interest calculations use the lower balance. Similarly, if you make a voluntary overpayment, the interest savings begin from the day the payment is processed by the SLC.
Does the Interest Rate Actually Matter?
This is perhaps the most counterintuitive aspect of UK student loans: for most borrowers, the interest rate is irrelevant. If your loan will be written off with a remaining balance (as projected for 70–75% of Plan 2 borrowers), the interest rate only affects the size of the balance at write-off — and since that balance is cancelled anyway, a bigger cancelled balance costs you nothing extra.
Think of it this way: whether your written-off balance is £30,000 or £80,000, the outcome for you is identical — the remaining balance disappears. The only people for whom interest rates genuinely matter are those who would repay the loan in full. For them, a higher interest rate means a larger total repayment, and a lower rate means a smaller total. But for the majority who will have their loan written off, the interest is purely cosmetic — an accounting figure that never translates into real money leaving your pocket.
This is why financial experts consistently advise against overpaying student loans for most borrowers. The interest rate, however alarming it looks, is only relevant if you are in the minority who will clear the balance in full. Use our calculators to check whether you fall into that category.
How Interest Rates Compare to Other Rates
It is tempting to compare student loan interest rates to mortgage rates or savings rates, but this comparison is misleading. A 6.2% student loan rate sounds alarming next to a 4% mortgage rate, but the student loan is income-contingent with a write-off — the mortgage is not. If you cannot afford mortgage payments, you lose your home. If you cannot afford student loan payments, they simply stop and resume when your income recovers.
A more meaningful comparison is between your student loan interest rate and the return you could earn by investing the money elsewhere. If you are considering overpaying your student loan, check whether a savings account, ISA, or pension contribution would give you a better return. Currently, many savings accounts offer 4–5%, which exceeds the Plan 1 rate (3.2%) but falls below the Plan 2 maximum (6.2%). For a full comparison, use our early repayment calculator.