Student loan interest rates could rise to 12% for some this September

The amount of interest you pay depends on when you started studying, and which country in the UK you applied to for finance. The calculation is usually based on March's Retail Prices Index (RPI) measure of inflation, which has been published today (Wednesday 13 April), and some loan 'Plans' add a certain percentage. 

If interest rates are linked to March's RPI as usual, then many will rise, as March 2022's RPI was 9%, up from 1.5% last March. The Government tends to confirm the actual rate used for student loans in August each year.

For current students in England and Wales (those on 'Plan 2' loans), the calculation used is March's RPI plus 3% – the reason their rate is set to rise to 12% in September. 

Of course, while an interest rate of 12% may sound scary, MoneySavingExpert.com founder Martin Lewis has always warned borrowers on these Plan 2 loans to take interest rates with a pinch of salt. This is because, unless you're a high earner and will pay back most or all of your loan, the amount of interest added doesn't make a difference to the amount you'll repay - we explain this in more detail below.See our How Plan 2 student loan interest works and Student loans mythbusting guide for more student finance need-to-knows.

Not all uni leavers will see interest rates of up to 12% – check how you're affected

Assuming the Government sets interest rates using the same methodology this year as it has in previous years, these are the interest rates you can expect to be charged from September, depending on which plan your loan falls under:

Interest rates are likely to be capped from March 2023

As part of the student loan legislation, there's something called the "Prevailing Market Rate" cap, which means that if student loan interest rates are higher than commercial lenders are charging on the open market, they are capped. 

The Institute for Fiscal Studies estimates that the maximum student loan interest rate is likely to fall to around 7% in March 2023, then fluctuate between 7% and 9% over the rest of 2023 and in to 2024. 

Yet, this cap has a six-month lag, so it's likely some graduates will be charged the higher 9% to 12% interest rates between September 2022 and March 2023 before the cap kicks in. 

Don't panic - the interest doesn't change what you repay each year

Student loans are repaid as a percentage of your gross salary above above a certain threshold, which varies depending on which plan you're on. If you're not earning, or earning less than the threshold for your loan, you don't pay anything back. Yet, even if you are making repayments, the amount you repay doesn't vary because you're suddenly being charged more interest. 

Taking Plan 2 as an example (though the other loans work on the same basis, just with different interest rates and repayment thresholds), students must repay loans at a rate of 9% of everything they earn above £27,295 each year. So if you earn £32,295, that's £5,000 more than the threshold, so you'll repay 9% of that – which is £450 a year.

This means the amount you owe (the borrowing plus interest) never has an impact on what you repay each year. To show this, if you were on a salary of £37,295 (£10,000 above the threshold):

- Student loan & interest: £20,000. Your earnings: £37,295.As you repay 9% of everything above £27,295 your annual repayment is £900.

- Student loan & interest: £50,000. Your earnings: £37,295. As you repay 9% of everything above £27,295 your annual repayment is £900.

As you can see, changing what you owe simply doesn't impact your repayments.

Currently, only 17% of Plan 2 borrowers repay their full student loan. And unless you're a high earner and will pay back most or all of your loan before it's wiped (which happens 30 years after you leave university), the amount of interest added doesn't make a difference to the amount you'll repay.

Some student loan repayment thresholds frozen - and a new loan system for many starting university in 2023

A number of changes to the higher education funding system have already been announced this year. Here's a quick round-up with links to more information where relevant:

• From 6 April 2022: Plan 2 repayment thresholds were frozen. The annual earnings threshold at which these borrowers start paying back their loans has been frozen at £27,295 until 2026/27, which adds around £113 a year to the total most will repay this year. 

• From 6 April 2022: Postgraduate loan repayment thresholds were frozen. The annual earnings threshold at which these loans start being repaid was frozen at £21,000 a year into the 2022/23 financial year, meaning many university leavers will pay £87 a year more than they would have done.

• From 6 April 2022: Plan 1 and Plan 4 repayment thresholds rose. The annual earnings threshold at which borrowers pay back Plan 1 loans increased from £19,895 a year to £20,195 a year. For Plan 4 loans the threshold rose from £25,000 a year to £25,375 a year. 

• From 1 September 2022: Pre-1998 loan repayment thresholds will rise. The annual earnings threshold at which these borrowers start paying back their loans will rise from £30,646 a year to £36,284 a year.

• For students starting university from September 2023, there's a new loan repayment plan. This will see students pay off their loans over 40 years instead of 30 and will cap the interest rate for repayments at the Retail Prices Index (RPI) rate of inflation. The loan repayment threshold for this new plan is set at £25,000 until 2025/26.