Complete analysis of 2025 interest rate changes and monthly cost impact on your loan balance
Student loan interest rates for the 2025-26 academic year have been confirmed following the March 2025 Retail Price Index announcement. Interest rates directly affect how quickly your loan balance grows during study and repayment, with different plans using different calculation methods. Understanding the new rates for your specific loan plan is essential for projecting long-term costs and making informed decisions about voluntary overpayments or accepting eventual write-off.
The Office for National Statistics published March 2025 RPI at two point eight percent, down from previous year peak of four point nine percent, reflecting moderating inflation as economic conditions stabilize. This RPI figure forms the base rate for most student loan interest calculations with additional percentages added depending on your loan plan and income level during repayment. Lower RPI compared to recent years provides some relief to borrowers though rates remain historically elevated compared to pre-2022 levels.
This guide provides complete analysis of 2025-26 interest rates including exact rates for all active loan plans, RPI methodology and implications for different borrower circumstances, monthly and annual interest cost calculations at typical loan balances, comparison to previous years showing rate trajectory, and future outlook considering economic forecasts. Whether currently studying or years into repayment, these rate changes affect your loan balance growth and ultimate lifetime costs.
Interest rates apply differently during study versus repayment periods and vary significantly by loan plan. March 2025 RPI of two point eight percent determines base rates effective from September 2025 for new academic year.
| Loan Plan | While Studying | During Repayment | Change from 24-25 |
|---|---|---|---|
| Plan 1 | 2.8% (RPI) | 2.8% (RPI) | -2.1% |
| Plan 2 | 5.8% (RPI+3%) | 2.8-5.8% | -2.1% |
| Plan 4 | 2.8% (RPI) | 2.8% (RPI) | -2.1% |
| Plan 5 | 2.8% (RPI) | 2.8% (RPI) | -2.1% |
| Postgraduate | 5.8% (RPI+3%) | 5.8% (RPI+3%) | -2.1% |
All loan plans see interest rate decreases of two point one percentage points reflecting lower March 2025 RPI compared to previous year. This is third consecutive year of declining rates after peaks in 2022-23 when RPI reached twelve percent creating interest rates as high as fifteen percent for some borrowers. Current rates remain elevated compared to pre-pandemic averages but represent significant moderation from recent extremes.
Plan 2 borrowers during repayment pay progressive rates from RPI only at lower incomes up to RPI plus three percent at higher incomes. Someone earning under twenty-eight thousand four hundred seventy pounds pays just two point eight percent while someone earning over fifty-one thousand pounds pays maximum five point eight percent. This creates substantial interest cost differences based on income level with higher earners facing much faster balance growth.
Plan 5 borrowers benefit from RPI-only interest at all income levels, a key distinction from Plan 2. On fifty thousand pound balance, Plan 5 borrower pays one thousand four hundred pounds annual interest while Plan 2 high earner at same balance pays two thousand nine hundred pounds, nearly double. This lower interest partially offsets Plan 5 lower threshold and longer write-off period.
Postgraduate loans consistently charge RPI plus three percent at all times regardless of income, currently five point eight percent. This is highest rate among all plans and applies equally during study and repayment. Someone with thirteen thousand pound postgraduate loan accumulates approximately seven hundred seventy-five pounds annual interest or sixty-five pounds monthly. Over typical Master's year, interest adds roughly five hundred pounds to balance before first salary earned. For combined loan impact, see our multiple degrees guide.
Understanding RPI methodology and how it affects student loan interest helps predict future rate movements and plan accordingly.
Retail Price Index measures inflation based on basket of goods and services purchased by typical households. ONS calculates RPI monthly comparing current prices to previous year. March RPI figure specifically determines student loan interest rates for upcoming academic year beginning September. Government chose RPI rather than alternative measures like CPI because RPI typically runs higher, generating more interest revenue from loan portfolio.
March 2025 RPI of two point eight percent means prices increased two point eight percent over twelve months from March 2024 to March 2025. This moderation from four point nine percent previous year reflects easing inflation pressures as energy costs stabilize and supply chain disruptions resolve. However, RPI remains above Bank of England two percent target and pre-pandemic historical averages around two to three percent, meaning interest rates remain elevated in historical context.
Consumer Price Index typically runs approximately one percentage point lower than RPI due to different calculation methodologies and housing cost treatment. March 2025 CPI was one point nine percent while RPI was two point eight percent, a difference of zero point nine percentage points. If student loans used CPI instead of RPI, current interest rates would be approximately one percent lower across all plans saving typical borrower several hundred pounds annually.
Government considered switching from RPI to CPI in 2022 consultation but ultimately maintained RPI after analysis showed this would reduce long-term loan repayment revenues by billions. Borrowers advocated strongly for CPI switch as fairer measure but government prioritized fiscal considerations. Future government may revisit this decision though political willingness to reduce student loan collections appears limited.
Student loan interest accrues daily based on outstanding balance multiplied by annual rate divided by three hundred sixty-five. On fifty thousand pound balance at five point eight percent, daily interest is seven pounds ninety-five pence. This compounds continuously meaning you pay interest on accumulated interest in subsequent periods. Over one year, fifty thousand pounds grows to fifty-two thousand nine hundred forty-eight pounds through daily compounding of five point eight percent annual rate, demonstrating powerful effect of compound interest on student loan balances.
Detailed breakdown of how interest rates apply to different loan plans during study and repayment phases.
Plan 2 uses complex progressive interest structure during repayment. Borrowers earning at or below threshold of twenty-eight thousand four hundred seventy pounds pay RPI only at two point eight percent. Interest increases progressively for income between threshold and fifty-one thousand pounds according to sliding scale. Someone earning forty thousand pounds pays approximately RPI plus one point five percent totaling four point three percent. Those earning fifty-one thousand pounds or more pay maximum RPI plus three percent at five point eight percent.
Plan 2 Interest by Income (2025-26):
£28,470 or below → 2.8% (RPI only)
£35,000 → 3.6% (RPI + 0.87%)
£40,000 → 4.3% (RPI + 1.54%)
£45,000 → 5.0% (RPI + 2.20%)
£51,000+ → 5.8% (RPI + 3%)
Plan 5 charges RPI only at all income levels eliminating progressive structure. Every Plan 5 borrower pays exactly two point eight percent in 2025-26 whether earning twenty-six thousand pounds or one hundred thousand pounds. This simplification represents major benefit for higher earners who under Plan 2 would pay five point eight percent. Someone with sixty thousand pound balance earning sixty thousand pounds saves one thousand eight hundred pounds annually in interest compared to Plan 2 equivalent.
Government introduced RPI-only interest for Plan 5 to offset other less favorable terms including lower threshold at twenty-five thousand pounds versus twenty-eight thousand four hundred seventy pounds and longer forty-year write-off versus thirty years. Analysis suggests most Plan 5 borrowers still repay more lifetime due to these other factors despite lower interest, but high earners definitely benefit from RPI-only structure avoiding punitive high-income interest rates.
Students currently studying pay interest from day loans are disbursed despite earning no income. Plan 2 and postgraduate students pay RPI plus three percent at five point eight percent throughout study. Three-year undergraduate borrowing fifty-seven thousand pounds accumulates approximately nine thousand five hundred pounds interest during study before first salary, graduating with sixty-six thousand five hundred pounds total debt.
Plan 5 students pay RPI only at two point eight percent during study, substantially lower than Plan 2. Same three-year course with fifty-seven thousand pounds borrowing accumulates approximately four thousand seven hundred pounds interest, graduating with sixty-one thousand seven hundred pounds total debt. This five thousand pound difference in starting post-graduation balance represents major Plan 5 advantage partially offsetting lower threshold and longer write-off.
Understanding monthly interest costs helps evaluate whether your repayments exceed interest accumulation and whether overpayments make financial sense.
Plan 2 Low Earner (£35k salary, £50k balance, 3.6% rate):
Monthly interest: £150.00
Monthly repayment: £48.98
Balance grows £101.02 monthly despite payments
Plan 2 High Earner (£60k salary, £50k balance, 5.8% rate):
Monthly interest: £241.67
Monthly repayment: £236.48
Balance grows £5.19 monthly despite high payments
Plan 5 High Earner (£60k salary, £50k balance, 2.8% rate):
Monthly interest: £116.67
Monthly repayment: £262.50
Balance decreases £145.83 monthly, will eventually repay
Plan 2 borrowers need approximately sixty-five thousand pounds annual salary before monthly repayments exceed interest accumulation on typical fifty thousand pound balance at maximum rate. Below this threshold, balance grows despite repayments due to interest outpacing payments. This explains why most Plan 2 borrowers never fully repay reaching write-off with substantial balance remaining to be forgiven.
Plan 5 borrowers reach repayment-exceeds-interest point around forty-five thousand pounds due to lower RPI-only interest. This means larger proportion of Plan 5 borrowers will eventually clear balances before forty-year write-off, which is intentional government policy design. For overpayment analysis, use our overpayment calculator.
Projecting future interest rates helps with long-term planning though exact rates depend on inflation trajectory which is inherently uncertain.
Bank of England forecasts suggest RPI will continue moderating toward three percent range over next two years as inflation pressures ease. This implies student loan rates around three percent for RPI-only plans and up to six percent for plans adding three percentage points. These would represent continuation of current trend toward more moderate rates after 2022-23 extremes.
However, inflation forecasting is notoriously difficult with external shocks like energy crises or geopolitical events potentially reversing progress. Conservative planning assumes rates could spike again to five to six percent RPI range creating total rates up to nine percent for highest categories. Building tolerance for rate volatility into long-term projections prevents being caught off-guard by future increases. For latest updates, monitor our academic year changes page.
Across all loan plans, interest rates decline by approximately two percentage points reflecting lower RPI inflation. This reduces monthly interest accumulation by hundreds of pounds for typical balances making loan management more affordable. However, rates remain elevated compared to pre-pandemic norms and most borrowers still see balances grow despite repayments due to interest exceeding payments at moderate income levels. Understanding your specific rate and monthly interest cost helps evaluate overpayment decisions and long-term planning.
For more updates, see our guides on threshold changes and Budget 2025 announcements.
UK Education Policy Specialist
With over 15 years of experience in UK education policy and student finance, Dr. Sharma founded Student Loan Calculator UK to help students navigate the complex world of student loans.