Labour has confirmed that interest rates on Plan 2 and Plan 3 student loans will be capped at a maximum of six per cent from September 1, replacing the existing formula of the Retail Prices Index (RPI) plus three per cent.
The temporary change will apply for the 2026 to 2027 academic year and affect students and graduates in England and Wales.
Ministers said the move was driven by concerns that the conflict in the Middle East could push inflation higher through increased oil prices.
Officials stated that graduates should not face higher borrowing costs as a result of global instability beyond the UK’s control.
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Student loan interest rates capped at six per cent for Plan 2 and 3 borrowers from September
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The reform is intended to prevent student loan balances from rising more sharply during periods of economic uncertainty.
However, early criticisms of the policy reference February's measure of RPI, at 3.6 per cent, meaning students are only shedding 0.6 per cent of total interest on their loans.
Under the current system, Plan 2 borrowers are charged interest ranging from RPI up to RPI plus three per cent, depending on their income.
Skills minister Jacqui Smith said: "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."
She added that the Government was acting to support those "most exposed within this already unfair system".
The minister also described the Plan 2 structure as "broken" and said further reforms to student finance were being considered.
Alongside the interest rate cap, the Government has announced plans to reintroduce means-tested maintenance grants from the 2028 to 2029 academic year.
Students from lower-income households will be eligible for up to £1,000 in non-repayable support under the proposal.
The repayment threshold for Plan 2 loans has increased twice in recent years, reaching £29,385 this month following a rise to £28,470 in April 2025.
The announcement follows sustained criticism of the student loan system and growing scrutiny of how interest is applied.
Oli Dugmore, editor of New Statesman, has previously criticised the use of RPI on student loans, saying: "The Government doesn't like using RPI as they believe it over-measures inflation, they prefer using the Consumer Price Index (CPI).
"Not when they're taking my money."
National Union of Students (NUS) has also criticised the system, arguing that it is not working effectively.
Graduates continue to struggle after leaving University amid a weak job market | GETTYAlex Stanley, the organisation’s vice president for higher education, said that changes to repayment thresholds risk increasing costs for graduates, particularly following decisions taken in the Autumn Budget.
Mr Stanley said graduates had seen terms repeatedly altered since taking out loans, affecting their monthly finances.
Polling by YouGov suggests there is growing public support for more significant reforms, including the possibility of cancelling student debt.
The announcement comes after the Chancellor acknowledged that the UK’s student loan system is “broken”, but said reform is not an immediate priority due to the state of public finances.
She previously argued that tackling child poverty and NHS waiting lists must come before any overhaul of student debt, and that it would be “more broken” to ignore the one in six young people currently not in education, employment or training (NEETS).