How Student Loan Interest Works in the UK

Interest starts from day one

Unlike a mortgage, which only begins accruing interest once you receive the funds, student loans in England and Wales (Plan 2 and Plan 5) start accruing interest from the first instalment paid to your university — typically October of your first year. By the time you graduate after three years, interest has been building for three full years on top of the original tuition fee and maintenance loans.

For a student taking a three-year Plan 2 course starting in 2021, graduating in 2024 with a £55,000 balance, the balance at graduation would already be higher than the nominal loans drawn — roughly £60,000–£65,000 depending on prevailing RPI. This is not unusual or alarming; it is how the system is designed, and the write-off clause accounts for it.

Which interest rate applies to your plan?

Each plan uses a different formula. The base index is always RPI (Retail Prices Index), measured in March and applied from the following September.

What is RPI and how is it measured?

RPI (Retail Prices Index) is a measure of UK consumer price inflation maintained by the Office for National Statistics. It differs from the more commonly cited CPI (Consumer Prices Index) in several ways: RPI includes housing costs such as mortgage interest and rent, uses an arithmetic mean (rather than geometric mean) across its basket of goods, and has historically run 0.5–1% above CPI.

The RPI figure used for student loan interest is the March reading, published by the ONS in April. For example, March 2025 RPI was approximately 3.5%, which set the base rate applied to loans from September 2025.

Why does our calculator use gilt curves instead of published RPI? The published RPI figure is a backward-looking measure — it tells you what inflation was last March. For a 30-year projection, we need forward-looking estimates for each future year. We derive these from the Bank of England’s gilt breakeven curve: the spread between nominal gilt yields and real (index-linked) gilt yields at each maturity. This spread reflects the market’s expectation of future RPI, not a fixed assumption.

The Plan 2 sliding scale explained

Plan 2 is the most complex interest structure. The surcharge above RPI depends on your income:

• Below £29,385RPI only (no surcharge, even while studying)
• £29,385 – £52,884RPI + 0–3% on a straight-line sliding scale
• Above £52,884RPI + 3% (maximum rate)

Worked example at £40,000 salary with March RPI of 3.2%:

While studying (income = 0), the rate is RPI only. The surcharge only applies once you are earning above the threshold.

Why does my balance keep growing?

Your income-contingent repayment is 9% of earnings above the threshold. In early career, this repayment is often less than the interest accruing each year — so the unpaid interest is capitalised (added to your balance). This is expected behaviour, not a sign of something going wrong.

Example: £30,000 salary, £50,000 Plan 2 balance, RPI 3.2%:

As salary rises, the repayment grows (9% of a larger amount above threshold) while interest growth moderates. At some point repayments exceed interest and the balance turns — you can see this inflection point on the balance over time chart in our calculator.

The key insight: a growing balance is only a financial problem if you would repay it all before write-off. If the balance gets written off regardless, the peak value is largely irrelevant.

How compound interest accumulates over 30 years

Student loan interest is calculated daily and compounded annually. This means interest accrues on your growing balance — including on previously capitalised interest. Over 30 years this is significant.

A £50,000 Plan 2 balance at a constant 4.5% interest (roughly RPI+1.5%), with no repayments at all, would grow to approximately £181,000 over 30 years. However, income-contingent repayments would also be growing over those years as salary rises. For most graduates, repayments overtake interest in their late twenties or early thirties, and the balance peaks and then falls.

The write-off at 30 years acts as a ceiling: however large the balance grows, it is cancelled at that point. This means a higher-balance borrower who earns moderately throughout their career may pay the same amount in real terms as a lower-balance borrower — both reach write-off with a large remaining balance.

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