plan 2 student loan interest rateplan 2 student loan interest rate

The Plan 2 student loan is one of the main types of student loans available to undergraduate students from England and Wales who started their course on or after 1 September 2012. With university fees rising in recent years, most students now take out loans to cover tuition fees and living costs while studying. An important consideration when taking out a Plan 2 student loan is the interest rate, which determines how quickly the debt grows after leaving university. This article provides an overview of how the Plan 2 interest rate is set, recent changes, and what graduates can expect to pay back.

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How The Plan 2 Interest Rate Is Set

The interest rate on Plan 2 loans is variable and linked to two main economic indicators:

  • The Retail Price Index (RPI) measure of inflation
  • The bank base rate

Specifically, the interest rate is the lower of the RPI or the bank base rate, plus an additional percentage based on income:

  • While studying and until April after leaving course: RPI + 3%
  • Income under £27,295: RPI
  • Income between £27,295- £49,130: RPI + up to 3% (sliding scale)
  • Income over £49,130: RPI + 3%

So in times of low inflation and base rates, the interest rate will be low. But in times of high inflation, RPI plus 3% could potentially exceed 6 or 7 percent.

The interest rate is set each September and applies for that academic year. It is usually announced in July or August each year.

Current Plan 2 Interest Rates

As of December 2022, the Plan 2 interest rate is 5.4%. This represents the March 2022 RPI of 1.4% plus the additional 3% while studying or in the first tax year after finishing university.

However, the government introduced a temporary rate cap between December 2022 and February 2023, meaning all borrowers will pay no more than 6.5% regardless of their current RPI+3% rate. This was in response to rising inflation and economic uncertainty.

Here is a summary:

  • Interest Rate until November 2022: 4.5% (September 2021 RPI of 2.9% + 3%)
  • Interest Rate from Dec 2022 to Feb 2023: Capped at 6.5%
  • Interest Rate from March 2023: TBC (to be set using September 2022 RPI of 11.7% + 3%)

So the interest rate is currently lower than normal but will likely rise from March 2023. Anyone with a Plan 2 loan should keep an eye on announcements to find out the new rate.

Historical Interest Rates

Since their introduction in 2012, Plan 2 loan interest rates have remained reasonable steady and affordable, typically between 4% and 6%.

However, the COVID pandemic and energy crisis has led to a spike in inflation and economic uncertainty recently. As a result, interest rates would have increased more sharply if not for short-term intervention by the government.

Here is how Plan 2 interest rates have changed over the past five years:

YearInterest RateNotes
2018-195.4%
2019-205.4%RPI of 2.4% + 3%
2020-214.5%Bank Base Rate + 3%
2021-224.5%RPI of 0.9% + 3%
2022-235.4%RPI of 1.4% + 3%
Dec 2022 – Feb 2023Capped at 6.5%Temporary interest cap

As the table shows, the September RPI inflation figure has been low in recent years resulting in interest rates between 4.5% and 5.4% for most borrowers. But the cap introduced for 2022-23 indicates rates would have increased more substantially without this intervention.

Impact On Monthly Repayments

The interest rate affects the overall cost of the loan but generally does not impact the monthly repayments for those currently repaying. This is because repayments are based on income, not the size of the total debt.

For example, a graduate earning £28,000 would currently repay £50 a month based on the Plan 2 repayment threshold and rates. This repayment is fixed at 9% of their income about £27,295 a year.

The interest rate mainly influences the length of time it takes to fully repay the loan. A lower rate means less interest accrues over time, whereas a higher rate means the balance grows more quickly.

Ultimately most Plan 2 loans are never fully repaid within the 30 year term, and are written off at the end. But a lower interest rate still means less owed at the end for graduates who do fully or partially repay their balance.

Expected Changes For 2023/2024

The Plan 2 interest rate for 2023/24 will be announced around July/August 2023 and take effect from September.

Given the UK’s rising inflation, the Office for Budget Responsibility suggests the interest rate could “exceed 7%” when set using the latest March 2023 RPI figure.

However, this remains uncertain. The government may again step in to cap rates if economic conditions haven’t stabilized.

In any case, the 2023/24 Plan 2 interest rate could see another increase, potentially rising to:

  • 6-7% while studying or in first tax year
  • 10-12% using latest RPI for certain income bands

The government has confirmed these potential rates would be temporary until inflation is under control. But graduates with Plan 2 loans should anticipate an increased interest rate in September.

Long Term Rate Trends

While the short-term outlook suggests spikes, interest rates should stabilize at more affordable levels long-term once inflation normalizes over the next several years.

The Institute for Fiscal Studies predicts that:

  • Interest rates are likely to remain low for current students
  • Average rates over 30 years expected to be RPI + 1%
  • Significant likelihood rates remain beneath RPI + 3% in the long run

Essentially, periods of low-inflation and economic growth will counterbalance any extreme rates triggered during recessions. Borrowers should focus on the overall average rate which likely won’t exceed 4-5% for most of the term.

Impact For Graduates

Fluctuating interest rates can make it difficult for graduates to forecast exactly how much their Plan 2 loan balance will grow after university.

In general, borrowers don’t need to worry about temporary spikes as long as average rates remain affordable over the full 30 year term.

The key impact of interest changes will be on:

  • Total debt – Higher rates increase the loan balance faster
  • Early/mid repayers – Significant extra interest can be paid compared to lower rates
  • Non/late repayers – Typically see loan written off so less affected by interest changes

Essentially, fluctuating interest rates have more influence for graduates who repay a substantial portion of their loan balance during the 30 years.

Conclusion

While the Plan 2 student loan interest rate remains somewhat variable and hard to predict, there are some key points to be aware of for current students:

  • The rate change each September using the March inflation level
  • Temporary spikes may happen but average rates expected to remain around RPI + 1% long-term
  • Monthly repayments stay the same based on income level rather than rate changes
  • Be prepared for a higher rate in 2023/24 though likely capped if very high inflation persists
  • Focus on your long-term graduate income which dictates affordability of repayments

Understanding how interest is applied to your Plan 2 student loan is key to making the right choices for you during study and into your post-university career. While rate rises are frustrating, the system remains fundamentally the same and designed to be affordable over a long timeframe.

Here is a summary table of the key Plan 2 student loan interest rates:

YearInterest Rate
2022-235.4% (1.4% RPI + 3%)
Dec 2022 – Feb 2023Capped at 6.5%
2023-24Expected 6-7%
Long Term EstimateRPI + 1% average over 30 years

References

  1. Department for Education. “Policy paper: plan 2 student loans interest rates 2023 to 2024 tax year” https://www.gov.uk/government/publications/plan-2-student-loans-interest-rates-2023-to-2024-tax-year
  2. MoneySavingExpert. “Student loans – all latest interest & repayment thresholds” https://www.moneysavingexpert.com/students/repay-post-2012-student-loan/
  3. Office for Budget Responsibility. “Commentary on student loan interest changes” https://obr.uk/efo/economic-and-fiscal-outlook-november-2022/
  4. Save the Student. “Latest plan 2 student loan interest rates & predictions” https://www.savethestudent.org/money/student-finance/interest-rates.html
  5. Student Loans Company.”Interest rates and thresholds” https://www.slc.co.uk/students-and-customers/interest-rates.aspx

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