Student Loan Interest Rates Explained

Interest is one of the most misunderstood aspects of student loans in the UK. Unlike conventional loans, student loan interest works differently, varies between loan plan types, and often has less impact on your actual repayments than you might expect. This guide explains how interest rates work across all UK student loan plans.

Understanding interest rates is important for making informed decisions about your student loan, especially if you're considering making voluntary repayments or are concerned about your loan balance growing over time.

UK student loan interest rates are primarily based on either the Retail Price Index (RPI) inflation measure, the Bank of England base rate, or a combination of both. Here's how each loan type's interest is calculated:

Plan 1 and Plan 4 Interest Formula

For Plan 1 and Plan 4 loans, the interest rate is set at the lower of:

• The RPI inflation rate (measured in the previous March)
• The Bank of England base rate plus 1%

This means if inflation is high but the Bank of England base rate remains low (as has been the case in recent years), your interest rate remains relatively low. This helps protect borrowers during periods of high inflation.

Plan 2 Interest Formula

Plan 2 has the most complex interest structure, varying based on your study status and income:

• While studying: RPI + 3%
• After graduation:
  • Earning below the repayment threshold (£27,295): RPI only
  • Earning between £27,295 and £49,130: Interest increases on a sliding scale from RPI to RPI + 3%
  • Earning over £49,130: RPI + 3%

This means higher earners are charged more interest, though the actual repayment amount depends on income, not the loan balance or interest rate. If you're earning a higher salary, check our guide on student loans for high earners.

Plan 5 Interest Formula

Plan 5 simplifies the interest calculation compared to Plan 2:

• Interest is set at RPI only, both during and after your studies
• Unlike Plan 2, there's no additional percentage added based on income

This makes Plan 5 interest rates more predictable and generally lower than Plan 2 for higher earners. For a detailed comparison, see our Plan 2 vs Plan 5 comparison.

Postgraduate Loan Interest Formula

Postgraduate loans have the simplest formula, but potentially the highest rate:

• Interest is set at RPI + 3% throughout the entire life of the loan
• This rate applies regardless of income or study status

A unique feature of UK student loans is that the interest rate often has less impact on your finances than you might expect. Here's why:

Repayments Are Based on Income, Not Balance

Unlike conventional loans, your monthly repayments are calculated as a percentage of your income above the repayment threshold - not based on the size of your loan or the interest rate. This means:

• A higher interest rate doesn't increase your monthly repayments
• Interest only affects how long it takes to repay and whether your loan will be fully repaid before being written off

Most Loans Are Never Fully Repaid

Government figures suggest that around 75-80% of recent graduates with Plan 2 loans will never fully repay their loans before they're written off. Similar projections exist for Plan 5 loans. If your loan is destined to be written off:

• The interest rate has little practical impact on your finances
• A larger balance due to higher interest doesn't matter if the loan will be cancelled anyway

When Interest Rates Do Matter

Interest becomes more important in these scenarios:

• Higher earners: If you're likely to pay off your loan in full, a higher interest rate means you'll pay more overall
• Voluntary repayments: If you're considering making extra payments, the interest rate affects whether this makes financial sense
• Psychological impact: Seeing your loan balance grow can be discouraging, even if it doesn't affect your monthly repayments

Interest rates on student loans have fluctuated significantly over time, primarily due to changes in inflation (RPI) and the Bank of England base rate.

Plan 1 and Plan 4 Historical Rates

Being linked to the lower of RPI or Bank Rate + 1%, these plans have seen relatively stable and low interest rates:

• 2016-2020: Generally between 1.1% and 1.75%
• 2020-2022: Dropped to just 0.1% due to historically low Bank of England rates during COVID-19
• 2022-2023: Increased to current rate of 1.75% as Bank Rate rose to combat inflation

Plan 2 Historical Rates

Being primarily linked to RPI, Plan 2 has seen more volatility:

• 2012-2016: Generally between 3.3% and 5.5% for studying/higher earners
• 2017-2022: Increased to a peak of RPI + 3% = 6.3% for higher earners
• 2022-2023: Reached a maximum of 7.3% (RPI + 3%) for higher earners as inflation surged
• 2023: Rate capped at 7.3% despite RPI exceeding 11% (due to government intervention)