How Do Student Loan Interest Rates Affect Repayments?

As a result of the continually rising cost of higher education, many students now leave University tens of thousands of pounds in debt. For example, a person starting their course in the 2022-23 academic year will accumulate an average of £45,600 in student loans. 

Education is expensive and the amount of interest paid on this debt can have a real impact on their lives for decades to come.

Read on to find out how student loan interest works so you can get a better idea of how much you’ll have to pay and when.

How does student loan interest work? 

Interest rates on student loan plans are fully or partly based on the Retail Price Index (RPI). RPI is a measure of inflation in the UK which tracks whether the cost of living is rising or falling. 

The government resets student loan interest rates every year on the 1st of September. The rate they choose is based on the RPI figure of the previous March.

However, the government can step in and make adjustments. For example, when the RPI rises significantly, the government could choose to introduce a cap on the maximum interest rate payable to make sure it remains below the prevailing market rate.

The prevailing market rate, sometimes called the comparable market rate, is how much it would cost you to get a loan from a bank, building society, or other financial institution. By taking this action, student loans remain competitive and affordable compared to standard loans.

You start repaying your student loan the April after you graduate or leave your course as long as you earn above the minimum threshold. Your employer withholds what you owe automatically through the PAYE system every time you get paid.

What is the student loan interest rate?

The student loan interest rate is variable and depends on where you’re from and when you were at university.

Loan location

If you took out your student loan in England, you’ll be on:

• Plan 1 if you began your studies between 1st September 1998 and 30th August 2012
• Plan 2 if you started between 1st September 2012 and 31st July 2023
• Plan 5 if you begin university on or after 1st August 2023

For Wales, you’ll be on:

• Plan 1 if you started your studies between 1st September 1998 and 30th August 2012
• Plan 2: For students who started on or after 1st September 2012

In Northern Ireland:

• You’re on Plan 1 if you started university after 1st September 1998.

For Scottish students:

• You’ll be on Plan 4 if you start university after 1st September 1998.
• Student loan interest rates in Scotland are the same as Plan 1 and Plan 5.

Plan type

There are five different student loan plans. The plan you’re on determines how much interest you will pay and what percentage of your salary above the threshold will be withheld by your employer for student loan repayments.

Student loan plan 1 interest rate and repayment schedule

The interest rate for Plan 1 loans is the lower of either the Bank of England base rate plus 1% or the Retail Price Index. At the time of writing, the rates stand at 4.3%

• Plan 1 interest rate as of September 2024: 4.3%
• Repayment threshold: £24,990 per annum (£2,082 per month)
• Repayment rate: 9% of earnings over the threshold

Plan 2 student loan interest rate and repayment schedule

The Plan 2 student loan interest rate is between RPI and RPI plus 3%, subject to the current government cap.

Plan 2 student loans are more complicated than the other plans. When you’re studying, the interest rate you’ll pay is the RPI plus 3%. After you graduate, it’s based on how much you earn.

If you earn at the threshold, your interest rate is RPI. If you earn between the threshold and £49,130, your rate is RPI + 3%. You’ll pay RPI plus an increment of 0.1% on top for every £727.83 you earn above the minimum threshold.

• Plan 2 interest rate as of September 2024: RPI + 3% when studying, RPI to RPI + 3% as a postgraduate
• Repayment threshold: £27,295 per annum (£2,274 per month) at RPI and £49,310 per annum (£4,109.17 per month) at RPI + 3%
• Repayment rate: 9% of earnings over the threshold

Plan 3 student loan (Postgraduate) interest rate and repayment schedule

Plan 3 student loan (also known as the Postgraduate loan) interest rates are RPI + 3%. As of September 2024, the government has capped this rate at 7.3% to take account of higher-than-average inflation.

• Plan 3 interest rate as of September 2024: 7.3%
• Repayment threshold: £21,000 per annum (£1,750 per month)
• Repayment rate: 6% of earnings over the threshold

Bear in mind that if you have taken any other student loans out and are still repaying them, you’ll pay 9% of your income over the lowest threshold on those loans.

Plan 4 student loan interest rate and repayment schedule

The interest rate on Plan 4 student loans is 4.3%. Plan 4 student loan interest rates are whichever is the lower between RPI and the Bank of England’s base rate plus one percent.

• Plan 4 interest rate as of September 2024: 4.3%
• Repayment threshold: £31,395 per annum (£1,750 per month)
• Repayment rate: 9% of earnings over the threshold

Plan 5 student loan interest rate and repayment schedule

The interest rate for Plan 5 loans is based on the RPI and stands at 4.3% in September 2024.

• Plan 5 interest rate at September 2024: 4.3%
• Repayment threshold: £25,000 per annum (£2,083 per month)
• Repayment rate: 9% of earnings over the threshold

How is the total student loan interest calculated?

The Student Loan Company charges you interest from the first day you or your university or college receives payment. They stop charging interest when you repay your loan or if your loan is cancelled. So, if you take a five-year course, you’ll build up five years’ worth of interest when you’re studying.

Student loan interest is calculated based on how much you borrow and the length of time it takes you to pay it back. Interest is added to your balance monthly meaning that the longer you take to settle the balance in full, the more interest you’ll pay.

How is the interest applied to the total balance?

All student loans have interest which the Student Loan Company adds to your outstanding loan balance. They do this every month until you repay the loan in full.

Student loans differ from other types of loans because what you repay is based on your earnings and not what you owe. No matter if interest rates are high or low, your monthly payment remains unaffected unless your salary changes.

However, higher interest rates mean that it will take you longer to fully repay the loan. That’s why if you pay off a significant proportion of your student loan early, you won’t see a drop in your monthly payments.

Discover more about student loans with Equifax

Many students are too young to have built a credit history. As a result, student credit reports generally don’t provide banks and building societies with the information they need to approve a loan or credit card. That’s why governments step in to offer students access to the finance they need.

If you’re still at Uni, check out our Student Debt Divide series of articles for expert insights into building your credit score when you’re at Uni covering topics from managing an overdraft to living on a budget.