Labour’s student loan cap will ONLY help graduates on more than £44k

Labour’s interest rate cap on student loans will only benefit graduates earning more than £44,300 per year, it was revealed today.

The interest rate on Plan 2 student loans has been capped at 6 per cent for one year from September 2026, in a move the Government claimed would help younger people manage rising costs if inflation spiked because of the Iran war. 

But today it has been revealed that the cap will only help those who earn more than £44,300, because of the way student loan interest is linked to inflation. 

On Plan 2, the interest rate is set at the rate of inflation, measured by the Retail Price Index (RPI) in March, with a further percentage added on top which increases the more that the graduate earns. 

It was announced this morning that March’s RPI was 4.1 per cent, meaning this is the base rate of interest graduates will pay from September. 

Those earning £29,385 or less accrue just the RPI rate of interest on their student loans, so will pay 4.1 per cent next year and won’t be helped by the 6 per cent cap. Those earning £29,284 or under don’t make repayments, but do still accrue interest. 

This year, the RPI rate was 3.2 per cent, so students in this band will actually see their interest increase year-on-year. 

 Labour’s interest rate cap on student loans will only benefit the highest earners, it was revealed today

Those earning £29,386 to £52,884 pay RPI plus between 0 and 3 per cent, with the add-on rate increasing on a sliding scale based on their income. 

According to calculations by campaign group Save the Student, only those earning more than £44,300 would have accrued more than 6 per cent interest without the new cap set by the Government.

Anyone earning less than that will also not be assisted by Labour’s cap, as their rate would not have hit 6 per cent. 

Those earning £52,885 or more pay RPI plus 3 per cent, so would have been paying 7.1 per cent but will now pay 6 per cent under the cap. 

It comes as Chancellor Rachel Reeves faces growing calls to reform Plan 2 student loans, which many students say they will never be able to clear as the interest is climbing faster than they can pay it off. 

You will be on Plan 2 if you took out an undergraduate student loan between September 2012 and July 2023 in England and Wales. 

The cap also applies to Plan 3 student loans, which cover postgraduate master’s or doctoral courses in England and Wales. They pay RPI plus 3 per cent so should benefit from the cap. 

Those on a Plan 1, 4 or 5 loan will see their interest rate increase by 0.9 per cent this year, from 3.2 per cent to 4.1 per cent. Their interest rate is set at only RPI, without the added percentage on top. 

This means that the vast majority of repayment plans will see their interest rate increase this year.

Tom Allingham at Save the Student said: ‘While we welcomed the certainty given by the 6 per cent interest cap on some student loans, it was always clear that it would have a limited impact – and today’s announcement underlines that.

‘Meanwhile, anyone with a Plan 1, 4 or 5 loan will see their interest rate increase by 0.9 percentage points, as no cap has been introduced for them.

‘With the interest rate set to rise later this year, yet more graduates will see their monthly repayments dwarfed by the extra debt added – and to a greater extent – making it even less likely they’ll repay in full before it’s eventually wiped.’

It is important to note that while interest rates will be going up for a lot of graduates, the monthly repayment amount will not change, as this is determined by your income. The interest is added to the total loan balance, extending the amount of time it will take to pay it off rather than increasing your monthly payments. 

Counting the cost: All graduates, regardless of the plan they’re on, pay 9% of their income over a certain threshold

From September 2026 until the end of August 2027, the most a Plan 2 or 3 graduate will pay in interest on their student loan is 6 per cent. 

These changes are only confirmed for the next academic year, starting in September 2026.

It is still unclear whether the interest rate cap will be extended beyond that date.

The Department of Education told This is Money that the interest rate would be under review but could not confirm a specific rate for a year’s time.

Unlike a standard loan, the system acts more like a graduate tax and increases the more you earn. What you pay back, and how, depends on which of the five different repayment plans you’re on. 

Most of those heading to university this year, along with anyone who started studying after 1 September 2023, are on Plan 5. This means they start to repay when they earn over £25,000.

In Scotland, students are on Plan 4 and will start to pay back the loan once earning over £32,745 a year.

Chancellor Rachel Reeves faced growing calls to reform Plan 2 loans after her Budget last year, in which she announced the salary threshold would be frozen at £29,385 for three years after it rises in April

Those who started university before 1 September 2012 will be on Plan 1 and start repaying their loan once they earn over £26,900 a year.

All graduates, regardless of the plan they’re on, pay 9 per cent of their income over that threshold, while those with postgraduate loans pay 6 per cent.

Plan 1 loans are written off after 25 years, Plans 2, 3 and 4 after 30 years, and Plan 5 after 40 years.

Chancellor Rachel Reeves faced growing calls to reform Plan 2 loans after her Budget last year, in which she announced the salary threshold would be frozen at £29,385 for three years.

This meant that more graduates will be dragged into repayments than if the threshold rose in line with inflation. At the same time, inflation will mean a £29,385 salary is worth less in real terms as time goes on.

Reeves initially defended the student loans system as ‘fair’ but last month said it was ‘broken’, while indicating any changes were not an immediate priority.

Many graduates on Plan 2 loans, taken out between 2012 and 2022, say interest is accruing faster than they can pay it off.

The average student loan balance for those who studied in England now sits at £53,010, according to Student Loans Company data acquired by the BBC.

More than 2.8million graduates now have at least £50,000 of outstanding student debt, up from more than 2.6million graduates in August 2025.

More than 5.3million student loans have grown since the borrowers passed their loans’ repayment threshold and started repaying them, according to Compare the Market. This is because interest is being added to graduates’ loans faster than they can pay it off.

One unlucky graduate owes the Student Loans Company (SLC) £314,356, more than the average house price in the UK.

Ian Futcher, financial planner at wealth manager Quilter, said: ‘The interest rate cap may dominate the headlines, but it does little to change the financial reality graduates are living with.

‘The real pressure point is the frozen repayment threshold, which is pulling more people into repayments earlier, as wages rise but still struggle to keep up with rising costs.’