Guidance on the interest rate cap updated

The Student Loans Company updated its published guidance on the student loan interest rate cap on 16 September 2024, according to the update logs on the GOV.UK pages for Plan 2 and Plan 5 loans¹. The pages set out how interest is calculated and applied, and how the cap interacts with the Retail Price Index (RPI)¹.

For Plan 5 loans, the guidance states that the interest rate is usually set on 1 September each year based on the RPI figure from the previous March, and that the rate charged is normally the RPI¹. The Department for Education monitors comparable market rates using monthly data published by the Bank of England, and if the average comparable market rate is lower than the rate being charged, a temporary cap is applied¹. The comparable market rate is reviewed monthly and the cap changed if necessary¹. The guidance states that the Plan 5 cap is not currently being applied¹.

For Plan 2 loans, the guidance states that the interest rate is set on 1 September using the RPI figure from the previous March, and that the Student Loans Company cannot change interest rates, which are set by the UK government and confirmed by the Department for Education². After leaving a course, the rate depends on income: RPI only at or below the lower repayment threshold of £29,385, RPI plus 3% at or above the higher threshold of £52,885, and RPI plus up to 3% between the two². The guidance states that the Plan 2 cap is currently being applied at 6%².

The published rate tables differ between the two plans. Plan 5 rates are single figures, while Plan 2 rates are given as ranges reflecting income, with the cap applied in some periods¹.

The Plan 2 page also lists rates for earlier years, including 1 March 2022 to 31 August 2022 at 1.5% to 4.5% (RPI+3%) and 1 January 2022 to 28 February 2022 at 1.5% to 4.4% (RPI up to interest cap)². The Plan 5 page lists rates back to 1 August 2023¹. The Plan 2 page states that when the cap is in place it applies to all Plan 2 loans, because the cap is not based on circumstances or income².

Why it matters for households

The cap determines the maximum interest added to a student loan balance in periods when commercial rates fall below the rate otherwise charged. For Plan 2 borrowers, the guidance states the cap is currently applied at 6%, so interest added to balances is limited to that level regardless of income². For Plan 5 borrowers, the cap is not currently being applied, so the rate charged is the RPI-based rate set on 1 September¹. Interest is added to the balance each month from the first payment until the loan is repaid or cancelled¹. For Plan 2 borrowers who are employed, RPI only is applied during the tax year from April to March, with the balance adjusted once income details are received from HMRC after the tax year ends². Borrowers overseas who do not keep employment details up to date are charged the highest rate of interest².

What happens next

The comparable market rate is reviewed monthly and the cap changed if necessary¹. The Plan 2 guidance states that interest will be capped at 6% between 1 September 2026 and 31 August 2027 for borrowers with annual income of £45,000 and £52,885 or more². The next annual rate setting is 1 September, based on the previous March's RPI¹.