Cap Plan 2 student-loan interest

Loan baseline

Plan 2 loans currently use RPI-based interest with higher earners facing higher rates, subject to government caps. IFS says the Conservative proposal mainly lowers balances for graduates earning above the threshold.

• Most monthly repayments do not fall immediately.
• Higher-earning graduates gain most in present value.
• Taxpayer exposure rises through lower repayments.

Core trade-offs

The policy reduces interest accumulation for graduates with Plan 2 loans. It is a costly and poorly targeted way to support graduates because many lower earners will never repay enough to benefit fully.

• Affected graduates see lower balances.
• Taxpayers absorb lower loan receipts.
• Distribution skews toward higher earners.

Fiscal impact by 2028-29

+GBP 0.5bn to +GBP 5.0bn. Central estimate: +GBP 2.0bn.

• Positive numbers mean net fiscal cost; negative numbers mean Exchequer savings.
• Main cost is lower student-loan repayments and interest receipts.
• Higher graduate consumption gives small indirect receipts.
• Cash effects are long horizon.
• This is not an official costing.

Economic impact by 2028-29

• Jobs: Little direct jobs effect; repayments do not change for most borrowers immediately.
• Wages: No wage effect; graduate disposable income changes later through lower repayments.
• Prices: No direct price effect expected.
• GDP / productivity: Small; subsidy does not directly raise skills or enrolment quality.

Assessment

The proposal is clear but not tightly targeted at hardship. Since repayments are income-contingent, reducing interest mainly benefits graduates who would otherwise repay more, especially higher earners with large balances.

Confidence: Medium-low. IFS evidence is strong on distribution; fiscal cost depends on long-run earnings and loan-writeoff forecasts.

Main risks

• Regressive tilt: Higher-earning graduates gain more from lower interest accrual.
• Long horizon: Costs emerge through loan accounting and repayments over decades.
• Weak skills effect: The policy subsidises balances rather than adding training or places.

Safeguards

• Publish lifetime distribution by graduate earnings.
• Compare with targeted maintenance support.
• Separate accounting cost from near-term cash cost.

Academic evidence

UK government evidence

Sources

• PolicyLens methodology: Cap Plan 2 student-loan interest Internal - PolicyLens, 2026
• Conservatives pledge to cut student loan interest Party policy source - Conservative Party, 2026
• Interest rate cap introduced to protect Plan 2 borrowers UK government announcement - Department for Education, 2026
• Options for changing Plan 2 student loans Research report - Institute for Fiscal Studies, 2026
• Economic and fiscal outlook: March 2026 Fiscal forecast - Office for Budget Responsibility, 2026
• Student Loans and Repayment: Theory, Evidence and Policy Academic handbook chapter - Lochner and Monge-Naranjo, Handbook of the Economics of Education, 2016
• Financial Aid Policy: Lessons from Research Academic article - Dynarski and Scott-Clayton, NBER, 2013
• Our Plan for Britain Party policy source - Conservative Party, 2026

Other Conservative policies

• Cut welfare spending by GBP 23bn
• Cut 132,000 Civil Service posts
• Create a 150,000-removals force
• Restrict social housing to UK nationals
• Cut overseas aid by GBP 7bn
• Cut net-zero subsidies by GBP 1.6bn
• Abolish stamp duty on main homes
• Abolish rates for high-street firms