Interest rates on Scheme 2 and Scheme 3 student loans will be capped at 6% from September, ministers have announced, amid concerns that higher inflation will stretch repayments for many graduates.
Ministers took the step after months of criticism that the loans had become a “debt trap”, often leaving graduates in England and Wales paying thousands more than the original loan amount.
Graduates with Scheme 2 loans currently pay interest rates based on the Retail Prices Index (RPI) measure of inflation – currently 3% – plus up to 3% when they earn more than £29,385. Currently, students on Scheme 2 and Scheme 3 loans charge the RPI interest rate plus an additional 3% interest while studying.
Scheme 2 student loans cover loans taken for undergraduate courses and Postgraduate Certificate of Education (PGCE) from 1 September 2012 in Wales and between 1 September 2012 and 31 July 2023 in England. Scheme 3 student loans cover postgraduate master’s or doctoral courses for borrowers in England and Wales.
With the prospect of an Iran war likely to send inflation soaring, the skills minister, Jacqui Smith, said: “We know the conflict in the Middle East is causing concern domestically, and while the risk of a global shock is beyond our control, it is impossible for us to protect people here.
“Capping the maximum interest rates on Plan 2 and Plan 3 student loans will provide immediate protections to borrowers, helping those who are most impacted in this already unfair system. We are acting now to protect against the consequences of distant conflicts in an uncertain world.”
However, these measures may not be enough to stop criticism of the system, as graduates are already paying higher interest rates than many other types of loans.
Labor MPs have lobbied the Government to reconsider freezing the student loan repayment cap – which will be capped at £29,385 for three years until 2030 and which is likely to increase graduate repayments by £300 a year.
National Union of Students (NUS) president Amira Campbell welcomed the announcement as “a huge victory”, but said the government needed to go much further. He said ministers had “waked up to the unfairness of student loans and are taking action to stop our debts spiraling out of control”.
Campbell said, “We have been forced to cope with these economic shocks for many years and finally the government has listened to our concerns. This is a huge victory for the more than 5 million people on Plan 2 loans, NUS and student unions across the country.
“But this change cannot come alone. For most graduates, the impact on their daily lives is felt through the repayment cap, which is being frozen for three years and will move very close to the minimum wage by 2030.
“We still need the Chancellor to stick to the terms we signed when we were 17 and raise the cap in line with our income. The Government have said they will look at the unfairness of the student loan system and we will hold them to that.”
The Prime Minister, Keir Starmer, has previously told MPs he will look at ways to make the student loan system in England fairer. The promise was made following comments from the Conservative leader, Kemi Badenoch, who said the system was “at breaking point” and had become a “debt trap” for graduates.
