Coronavirus - Get the latest updates and resources from MyWalletHero - Find out more.
Advertiser Disclosure
Do you pay interest on student loans in the UK?

Do you pay interest on student loans in the UK?

By: Kate Anderson | 24th May 2020

The simple answer to the question ‘do you pay interest on student loans in the UK?’ is yes.

But student loans are unlike any other personal loan product in that the interest rate is tied to the rate of inflation. Added to that there are different rates depending on the type of student loan you have. 

Confused? You needn’t be. We’re here to break it down for you.

There are two plans you could be on if you have a student loan in the UK. Which plan you are on depends on when you started your higher education course.

Interest rates for Plan 1 student loans

You will be on Plan 1 if you are:

If this is you, then the interest you are charged on your student loan is basically kept in line with inflation. The interest rate for Plan 1 student loans is the Bank of England base rate (currently 0.75%) plus 1%, or just the rate of inflation, whichever is lowest.

The rate for Plan 1 is usually set on 1 September each year, but it can change during the year too. 

Interest rates for Plan 2 student loans

You will have a Plan 2 student loan if:

Plan 2 interest rates are slightly more complex. There is one interest rate while you are studying, and a different rate once you graduate and begin earning a salary.

Firstly, while you are studying (until the April after you have graduated), your loan interest rate is the retail price index (RPI) plus 3%. The RPI is a measure of inflation and can fluctuate during the year. However, the interest rate for Plan 2 student loans is set on 1 September each year and is based on the RPI of the previous March. At the time of writing, the total rate is 5.4%, which includes the RPI at 2.4% and the additional 3%.

Once you reach the April after your graduation, your student loan interest rate changes. What you are charged depends on how much you earn.

Annual income Interest rate
£25,725 or less RPI (currently 2.4%)
£25,725 to £46,305 RPI plus up to 3%
Over £46,305 RPI plus 3%

As you may have noticed, the rate for the middle income bracket is RPI plus ‘up to 3%’. This is because the added percentage will rise in line with your earnings. So if you earn in the middle of this band (£36,015), your interest rate would be RPI plus 1.5%.

If you are interest in learning more about student loans, then take a look at our other articles including ‘When does my student loan get written off in the UK?‘ and ‘Should I repay my UK student loan right now?‘.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.