Politics Home Article | Student Loans To Be Capped At 6 Per Cent As Iran War Drives Inflation

(Alamy)

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The cap will be applied to Plan 2 and Plan 3 loans. The former has been the subject of growing debate in recent weeks, with the government facing calls to ease the financial burden it is putting on graduates.

Minister for Skills, Jacqui Smith, said on Tuesday that while “the risk of global shocks” from the war is “beyond our control, protecting people here is not.”

The move means that no graduate faces an interest rate above six per cent from September for the 2026-27 academic year. The interest applied to student loans is fixed by academic year, using the Retail Prices Index (RPI) value for the year to March of the first year (in this case, March 2026).

It comes after the student loan system has faced fresh scrutiny in recent months, following the government’s decision to freeze the threshold at which graduates start to repay their loans.

Under the current system, those who began university between 2012 and 2022 were placed on a Plan 2 loan and are now charged interest on their loan repayments equal to RPI plus up to 3 percentage points.

Plan 3 loans, also known as postgraduate loans, are those taken out for master’s or doctoral courses by borrowers in England and Wales.

However, monthly repayments often do not meet interest, leaving many graduates with debt larger than what they originally borrowed, years after leaving university.

PoliticsHome reported earlier this year that opposition parties were all looking at how the system can be changed as part of their policy work, while Labour MPs have had discussions with sympathetic ministers about what can be done to address the perceived unfairness.

Smith said today: “We know that the conflict in the Middle East is causing anxiety at home, and while the risk of global shocks is beyond our control, protecting people here is not.

“Capping the maximum interest rate on Plan 2 and Plan 3 student loans will provide immediate protection for borrowers, supporting those who are most exposed within this already unfair system.

“We’re acting now to defend against the consequences of faraway conflicts in an uncertain world. More broadly, we’re bringing back maintenance grants and continuing to look at the broken Plan 2 system we inherited, and the wider student finance system, to make it fairer for students, graduates and taxpayers.” 

Prices have soared across the world due to severe disruption to the Strait of Hormuz, a vital trade route, impacting energy and food prices. 

The volume of maritime traffic using the route, which is responsible for large amounts of the world’s oil and gas, has plummeted since the US and Israel first attacked Iran, with Tehran threatening to attack ships attempting to pass through it.

The disruption is expected to result in rising inflation in the UK later this year, which would affect a range of areas, including student loans.

US President Donald Trump has warned that Iran must reopen the strait by 1am Tuesday UK time or face increased attacks.

Amira Campbell, National Union of Students President, said: “This government have woken up to the unfairness of student loans, and are taking action to prevent our debts from spiralling further out of control.”

But Campbell said the change “cannot come alone”.

“For most graduates, the impact on their day-to-day lives is felt through the repayment thresholds, which are being frozen for three years and will get very close to the minimum wage by 2030. We still need to see the Chancellor stick by the terms we signed at 17 years old, and raise the threshold in line with our incomes. 

“The government have said they will look into the unfairness of the student loan system, and we will continue to hold them to that.”