Student Loan Interest Rates Explained
Understanding how interest is calculated on UK student loans and why your balance might grow even while you're repaying.
The basics: What is RPI?
Most UK student loan interest rates are based on RPI (Retail Price Index), a measure of inflation that tracks the cost of goods and services.
ℹ️Current RPI (March 2024):
3.2%
This means prices increased by 3.2% over the past year
RPI changes monthly based on economic conditions. Student loan interest rates are typically updated in September each year based on the March RPI figure.
Interest rates by plan type
💡Plan 2, Income-linked variable rate
While studying: RPI + 3% (currently ≈6.2%)
Earning under £28,470: RPI only (currently ≈3.2%)
Earning £28,470-£52,195: RPI to RPI+3% on a sliding scale
Earning over £52,195: RPI + 3% (currently ≈6.2%)
Plan 2 is unique as high earners assume higher interest rates.
ℹ️Plan 1 & Plan 4
Lower of:
- RPI (currently 3.2%), or
- Bank of England base rate + 1%
This cap protects borrowers during high inflation periods
✅Plan 5
RPI only (currently ≈3.2%)
Simplified from Plan 2, no income-based penalty for high earners
📝Postgraduate Loans
RPI + 3% (currently ≈6.2%)
Flat rate regardless of income
When does interest start accumulating?
Interest starts accumulating immediately from the day money is paid out:
- Tuition fee loans: Interest starts from the day it's paid to your university (usually start of each term)
- Maintenance loans: Interest starts from the day money enters your bank account
- While studying: Interest accumulates but no repayments are due
- After graduation: Interest continues while you repay
Example: A student starting in September 2022 with a £9,250 tuition loan will have accumulated approximately £185 in interest by the time they graduate in June 2025 (at 6.2% for Plan 2 while studying).
Why your balance might grow despite repaying
Many borrowers are shocked to see their loan balance increase year after year, even while making monthly payments. This is completely normal:
Worked example: Plan 2, £45k balance, £32k salary
Annual repayment: (£32,000 - £28,470) × 9% = £318
Annual interest: £45,000 × 6.2% = £2,790
Net change: Balance grows by £2,472 this year
This is by design. The system expects most borrowers' balances to grow. Around 80% of Plan 2 borrowers will never fully repay their loans; they'll be written off after 30 years with a remaining balance.
Plan 2's income-linked interest explained
Plan 2's sliding scale is unique and often misunderstood. Here's how it works:
| Income Range | Interest Rate | Current Rate |
|---|---|---|
| Under £28,470 | RPI only | ≈3.2% |
| £28,470 | RPI + 0% | ≈3.2% |
| £35,000 | RPI + 0.83% | ≈4.0% |
| £40,000 | RPI + 1.46% | ≈4.7% |
| £52,195+ | RPI + 3% | ≈6.2% |
The interest rate increases gradually for each £1 earned between £28,470 and £52,195, reaching the maximum at £52,195.
⚠️Plan 2 income linked interest and statements
What salary do you need to start reducing your balance?
To actually reduce your loan balance, your annual repayments must exceed annual interest. This requires surprisingly high salaries:
Plan 2 (£45k balance)
Interest at 6.2%: £2,790/year
Salary needed: ≈£59,500
At £59k, you pay £2,793/year, just exceeding interest
Plan 4 (£25k balance)
Interest at 3.2%: £800/year
Salary needed: ≈£41,600
Lower interest means balance reduces at more attainable salaries
Implication: Most Plan 2 graduates need to earn £60k+ before their balance starts decreasing. Below this, you're effectively paying a graduate tax with no realistic prospect of clearing the debt.
How often are rates updated?
Student loan interest rates are typically updated once per year:
- September 1st: New rates take effect
- Based on March RPI: Uses RPI figure from 5-6 months earlier
- Fixed for 12 months: Rate stays constant until next September
- No mid-year adjustments: Even if inflation changes dramatically
Example: The rate from September 2024 to August 2025 is based on March 2024's RPI of 3.2%, even if RPI rises to 5% during the year.
Should high interest rates make me overpay?
Even with interest rates as high as 6.2%, overpaying is rarely the right choice:
❌Why NOT to overpay (typical earner)
- You'll likely reach write-off with a remaining balance
- Overpayments are money you'll never see again
- Better to maximise pension contributions
- Can't get refunds if overpaid
✅When to consider overpaying
- Very high salary (£80k+) early in career
- Small remaining balance (<£15k)
- Confident you'll repay in full
- All other finances optimised
See our overpayment calculator and guide for personalized analysis.
Key takeaways
Interest starts from day one, even while you're still studying
Plan 2 penalizes high earners with up to 6.2% interest
Most borrowers' balances will grow despite making payments
You typically need £60k+ salary to reduce a Plan 2 balance
The system is designed for write-off, balance growth is expected