UK: Change to maximum Plan 2, Plan 5 and Postgraduate student loan interest rates
The Department for Education (DfE) has confirmed that the maximum Plan 2 and the Postgraduate loan interest rate will be 7.1% between 1 June 2023 and 31 August 2023.
Since September 2022 the maximum Plan 2 and the Postgraduate loan (PGL) interest rate has been capped in line with the latest prevailing market rate available at the time of setting the cap. Between 1 September 2022 to 30 November 2022, this meant the maximum Plan 2 and the PGL interest rate was 6.3%, increasing to 6.5% between 1 December 2022 to 28 February 2023 and 6.9% between 1 March 2023 to 31 May 2023.
From 1 June 2023 to 31 August 2023, the maximum Plan 2 and the PGL interest rate will be 7.1%, to take into account the most recent increase in the prevailing market rates. From 1 August 2023 the cap will also apply to Plan 5 (undergraduate) loans, which are being introduced for Academic Year 2023/24.
From 1 September 2023 the maximum Plan 2 and the PGL interest rate is scheduled to revert to RPI+3%, and the Plan 5 interest rate to RPI. Further caps will be implemented, if required, to reduce student loan interest rates to align with the prevailing market, and will be confirmed closer to the time.
The prevailing market rate is not defined in law, nor does any product on the market offer a direct “market rate” comparison to student loans. The most appropriate market rate comparators for student loans are the effective interest rates available on unsecured personal loans, with the Bank of England’s effective interest rate data (series CFMZ6LI (existing loans) and CFMZ6K9 (new loans)), being the most appropriate benchmark for student loan interest rates. To determine the “prevailing” market rate, a 12-month rolling average is taken. As such, the prevailing market rate has been defined as the minimum of the 12-month rolling averages of the Bank of England’s effective interest rate data series’ CFMZ6LI and CFMZ6K9.
Where the Government considers that the student loan interest rate is too high in comparison to the prevailing market rate, it will reduce the maximum Plan 2, Plan 5 and Postgraduate Loan interest rate by applying a cap for a set period of three months (or longer, if the prevailing market rate remains below the student loan rate at the next monitoring point). This is done by amending Education (Student Loan) (Repayment) Regulations 2009. The prevailing market rate used for setting a cap in a given quarter is based on the latest available CFMZ6LI and CFMZ6K9 data, which is the data going up to 2 months prior to the start of the quarter, e.g. the cap set for between March and May 2023 was based on the January 2022 to December 2022 data.
Plan 2 borrowers will continue to repay 9% of their earnings over the repayment threshold. The repayment threshold for Plan 2 ICR loans is £27,295 for FY23-24.
Plan 2 ICR loans are those loans taken out for a course starting between 1 September 2012 and 31 July 2023 (England), or after 1 September 2012 (Wales)
Postgraduate loan borrowers will continue to repay 6% of their earnings over the repayment threshold. The repayment threshold for Postgraduate loans is £21,000 for FY23-24.
Postgraduate loans are those loans taken out for Postgraduate level study.
Plan 5 loans are being introduced for Academic Year 2023/24, available for undergraduate courses starting after 1 August 2023 (England only).
Plan 5 loan borrowers are not due to come into repayment until April 2026.
Plan 1 ICR loans, i.e. loans taken out for a course starting before 1 September 2012, are not affected.