- Government announces 6% cap on interest rates on Plan 2 and 3 student loans from September (Source: Interest rate cap introduced to protect Plan 2 borrowers)
- The measure is intended to protect graduates from a potential spike in inflation due to conflict in the Middle East
- Decision follows widespread objection to chancellor’s freeze of repayment threshold announced at the Budget
Danni Hewson, head of financial analysis at AJ Bell, comments:
“The decision to cap the interest paid on Plan 2 and 3 student loans at 6% from September will help alleviate growing concerns about the impact another inflation spike could have on graduates.
“Intervention by the previous government during the last cost of living crisis prevented rates hitting double digits and there had been fears the war in Iran could push up costs once again.
“Proactively introducing a cap will help alleviate some of the worry facing young people, but it stops massively short of tackling a system which is fundamentally broken.
“Whilst the cap will stop rates spiralling, the use of RPI as a measure seems massively unfair to all students including those about to make the first repayments of the new Plan 5 loans.
“Frozen thresholds mean graduates start paying back the debt earlier, with repayments nibbling away at salaries just as costs shoot up everywhere else.
“For many, the cash being docked from their wages won’t even touch the sides of their debt mountains and even if graduates accept the debt will eventually be written off, it’s a difficult mental load to carry.
“It also makes it harder for the next generation to take the longed-for next steps like buying a first home or starting a family, both of which are hugely important to the health of the UK economy.
“But for a government already facing up to a long and difficult winter, finding the cash to make a major difference to graduates’ lives would require either spending cuts, tax hikes or the fiscal goal posts to be moved.”
