A guide to student loans and interest

Clare Kneebone

6 min read

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Please note this article is for general educational purposes. This article will give you an overview of student loan interest, how it works, and why it matters. You might wish to seek professional advice. 

If you’re thinking about going to university, it’s important that you understand the funding options available to you as an undergraduate. And probably the first thing that springs to mind is student loans, which are an essential source of income for many students.

They can help pay your tuition fees and living costs while you’re studying, but if you’re considering taking out a student loan, you may be wondering how much you’ll have to pay back. So, we thought we’d break down how student loan interest works, so you’re fully informed.

Are student loans interest free?

If you take out a student loan, it’s important to know that they aren’t interest free.

The rate of interest you pay generally relates to the Retail Price Index (RPI), which is an average measure of changes to the price of goods and services in the UK over time. The interest rate on student loans is usually updated in September each year and is based on the RPI from March of that year. This means that the relative value of the balance of your loan will remain the same as it was when you took it out.

When student loan interest starts

You’ll be charged interest from the day you, or your university or college, receive your first payment from the Student Loans Company. You’ll continue to be charged interest up until the time you repay your loan in full, or the balance is cancelled.

How student loan interest works

When you take out a student loan, you’ll initially deal with the student finance body for your home nation. This would be either England, Wales, Northern Ireland or Scotland. However, after that, all loans are managed by the Student Loans Company.

Each nation is referred to by a plan number and has a slightly different way of managing interest charges and repayments.

Plan*The nation issuing your loanHow your interest rate is set
Plan 1Northern IrelandRPI or the Bank of England base rate + 1% (whichever is lower)
Plan 2Wales (or England before 1 August 2023)RPI plus 3% while you’re studying RPI and your income once you graduate
Plan 4ScotlandRPI or the Bank of England base rate + 1% (whichever is lower)
Plan 5England (after 1 August 2023)RPI

*correct as of January 2025

Plans 2 and 5 have a cap in place to make sure the maximum rate of interest doesn’t exceed the average rate for personal loans from commercial banks or other lenders, over a rolling 12-month period (this is known as the ‘prevailing market rate’).

However, unless the cap is required, the interest rate for plans 2 and 5 will follow the criteria in the table above.

In case you’re wondering why there’s no Plan 3, there is, but it relates to postgraduate courses in England and Wales, so we’re not covering it in this article, as we’re focussing on undergraduates.

Unlike a commercial loan, your repayments will be based on your income rather than the amount that you borrowed.

It’s important to remember that in the long term, your monthly repayments won’t be affected by the amount of interest you’re charged. However, the interest will add to the overall amount you owe, which means it will increase the time it takes you to pay back your loan.

If you’re studying full-time, you’ll only start to make repayments from the April after you complete or leave your undergraduate course. If you’re a part-time student, repayments will start in April four years after your course began, or the April after you finish or leave your course, whichever comes first.

Whether you’re studying full or part-time, you’ll only have to make repayments if you earn above a certain threshold. Even then, you’ll only pay back 9% of your income above that amount. If your income drops below the repayment threshold, you’ll stop making payments until it goes back up again.

As with any other loan, make sure you’re fully aware of what you’re committing to before you sign up for it.

Full details of current student loan interest rates and repayment thresholds can be found at GOV.UK.

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