UK caps student loan interest rates at 6% citing global inflation risks

LONDON, April 7 (Reuters) - Britain said ​on Tuesday ⁠it would cap interest rates on millions ​of student loans at 6% from September 2026, saying conflict in the Middle East risked pushing up ​inflation ‌and sharply increasing borrowing costs for graduates.

The student loan system in England and Wales has ⁠drawn criticism and Prime Minister Keir Starmer said in ⁠February he would look at ways ​to make it fairer.

The government has been accused by some lawmakers, including in his own Labour Party, of ripping off graduates with inflated interest charges and unfavourable repayment conditions.

The ​Department for ‌Education said on Tuesday the cap on so-called plan 2 and plan 3 student loans would apply for the 2026/27 academic year, overriding a formula that links interest rates to inflation and allows charges of up to the Retail Prices Index (RPI) plus ​3 percentage points.

'BROKEN' SYSTEM

The government said intervention was necessary to protect borrowers from temporary ‌inflation spikes caused by global shocks and graduates should not bear higher debt costs stemming from the war.

"Capping the maximum ‌interest rate on plan 2 and plan 3 student loans will provide immediate protection for borrowers, supporting those who are most exposed within this already unfair system," said Jacqui Smith, ​the skills minister in the Department for Education.

She said the government would continue to look at ‌what she called the "broken" plan 2 system to make it fairer.

Most criticism has focused on plan 2 loans, taken out by students who began university between September 2012 and ⁠July 2023. These ⁠loans are held by an estimated 5.8 million ‌people.

Tuition fees have been capped at 9,535 pounds ($12,657) in England and Wales in the current academic year.

Graduates ​with plan 2 ​loans currently pay interest ranging from RPI to RPI plus ‌3%, depending on earnings. Students on plans 2 and 3 accrue interest at RPI plus 3% while studying.

If not repaid after 30 years, the debt is cancelled. ($1 = 0.7533 pounds) (Reporting by Sam Tabahriti; Editing by Andrew Cawthorne)