The Motley Fool
My Wallet Hero

Do you pay interest on student loans in the UK?

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. 

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

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:

  • An English or Welsh student who started an undergraduate course anywhere in the UK before 1 September 2012.
  • A Scottish or Northern Irish student who started a course on or after 1 September 1998.

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:

  • You started your course after 1 September 2012 in England or in Wales.

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?‘.

Educating yourself on personal finance and understanding the financial products that you use everyday can make the difference between comfortable finances and constant stress. At MyWalletHero, we aim to make learning about personal finance rewarding and fun.

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

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. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.