How Student Loan Interest Works in the UK

Last updated: March 2026 · View current rates

Interest Starts From Day One

A common misconception is that interest only starts once you graduate or begin repaying. In reality, interest accrues from the day your first loan payment is made — whether that's a tuition fee payment to your university or a maintenance loan payment to your bank account. This means your balance is growing throughout your time at university, before you've even started working.

How Is the Interest Rate Calculated?

The interest rate varies depending on which loan plan you are on. All UK student loan rates are linked to the Retail Prices Index (RPI), which is a measure of inflation published each March by the ONS. The rate is then set from the following September.

Plan 1 & Plan 4

The interest rate is the lower of RPI or the Bank of England base rate + 1%. This means Plan 1 and Plan 4 borrowers generally have the lowest interest rate. For the2026/27 academic year, this is 3.2%.

Plan 2

Plan 2 uses a sliding scale based on your income:

• While studying: RPI + 3% (the maximum rate). For 2026/27 this is 6.2%.
• Earning below £28,470: RPI only (currently 3.2%).
• Earning £28,470 – £51,245: RPI + up to 3%, sliding on a straight-line scale based on income.
• Earning above £51,245: RPI + 3% (the maximum, currently 6.2%).

This means higher earners on Plan 2 pay significantly more interest, but they are also the people most likely to fully repay their loan and benefit from overpaying.

Plan 5

Plan 5 (introduced August 2023) charges RPI only — there is no income-based margin. This is a key improvement over Plan 2 for new borrowers, though the write-off period is longer at 40 years.

Postgraduate Loans

Postgraduate Master's and Doctoral loans use the same sliding scale as Plan 2: RPI + up to 3% based on income.

What Is RPI?

RPI (Retail Prices Index) is a measure of consumer price inflation in the UK. It tends to run slightly higher than CPI because it includes housing costs like mortgage interest payments. The government uses the March RPI figure each year to set student loan interest rates from the following September.

When RPI is high (as it was in 2023, at 13.5%), student loan interest rates spike dramatically. When RPI is low, rates are more modest. The March 2025 RPI figure of 3.2% set the rates from September 2025.

Why Does My Balance Keep Growing?

For many borrowers — especially those on Plan 2 and Plan 5 — the interest added each year exceeds the repayments deducted from their salary. This means the outstanding balance actually increases over time, even though you are making repayments.

This is entirely normal and is not a cause for concern in itself. What matters is not the headline balance, but whether you will fully repay before the write-off date. If you won't (which is the case for most Plan 2 borrowers), the growing balance is irrelevant — it gets written off regardless.

Interest Rate Caps

The government applies interest rate caps to prevent rates from becoming excessively high. For example, even when RPI + 3% would produce a rate of 16.5% (as nearly happened in 2023), the cap ensured rates did not exceed 7.6%. These caps vary by plan type and are set annually. Check our rates & thresholds page for current figures.

Compound Interest

Student loan interest is compounded daily on the outstanding balance. This means interest is calculated on the total amount owed (including previously accrued interest), not just the original amount borrowed. Over a 30–40 year loan term, this compounding effect means the total interest charged can significantly exceed the original debt.

See Your Own Interest Projection

Use our student loan repayment calculator to see exactly how interest accumulates on your loan, year by year, based on your salary and plan type.