The government has announced that interest rates on plan 2 and plan 3 student loans will be capped at 6% starting in September.
The decision comes as ministers worry that rising inflation could significantly increase repayment amounts for graduates in England & Wales.
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The move follows months of complaints about student loans becoming a debt trap that forces many graduates to pay back tens of thousands more than they originally borrowed.
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Currently graduates with plan 2 loans pay interest based on the retail prices index measure of inflation which stands at 3% plus up to 3% extra when they earn more than £29,385.
Students on plan 2 and plan 3 loans pay RPI plus 3% while they are still studying.
Plan 2 loans apply to undergraduate courses and teaching qualifications taken out since September 2012 in Wales and between September 2012 and July 2023 in England.
Plan 3 loans cover postgraduate courses for students in England & Wales.
Skills minister Jacqui Smith said the conflict in the Middle East is causing worry at home and while global shocks cannot be controlled protecting people here is possible.
She explained that capping the maximum interest rate will provide immediate protection for borrowers who are most exposed within an already unfair system.
However the measures may not stop criticism of the system since graduates already pay high interest rates compared to other types of debt.
Labour MPs have pushed the government to reconsider a freeze on the student loan repayment threshold.
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The threshold will stay at £29385 for three years until 2030 which will likely increase graduate repayments by up to £300 per year.
Amira Campbell who is president of the National Union of Students called the announcement a huge win but said the government needs to do much more.
She noted that ministers have recognized the unfairness of student loans and are taking action to prevent debts from spiraling out of control.
Campbell said that for too many years students have been forced to deal with economic shocks and finally a government has listened.
She pointed out this is a major victory for over 5 million people on plan 2 loans and students’ unions across the country.
She added that this change cannot stand alone because most graduates feel the impact through the repayment thresholds which are frozen for three years & will get very close to minimum wage by 2030.
Campbell said the government needs to honor the terms students agreed to at 17 years old and raise the threshold in line with incomes.
Prime Minister Keir Starmer previously told MPs he would examine ways to make the student loan system fairer.
This promise came after Conservative leader Kemi Badenoch said the system was at breaking point and had become a debt trap for graduates.
