Cap Plan 2 student-loan interest: calculation note

Central fiscal result

+£2.0bn - Net fiscal impact in 2028-29

Low case: +£0.5bn. High case: +£5.0bn. Positive numbers are fiscal costs or borrowing pressure. Negative numbers are Exchequer savings or receipts.

Scenario and baseline

• Model Plan 2 interest capped at RPI from 2028-29.
• Central fiscal cost is £2bn annualised loan-impact equivalent.
• Baseline includes DfE cap at 6 percent for 2026-27.
• Plan 5 loans are not changed centrally.

Affected population

• Affected population is borrowers with Plan 2 student loans.
• Direct gains are larger for higher earners and larger balances.
• Monthly repayments mostly do not change immediately.
• Taxpayers bear lower eventual loan receipts.

Gross impact

• Central cost: £2bn annualised loan-subsidy effect.
• Low case assumes lower RPI and more write-offs anyway.
• High case assumes high balances and higher graduate earnings.
• No enrolment or productivity effect is booked.

Fiscal build-up, central case

• Lower student-loan interest receipts: +£2.1bn
• Higher graduate consumption receipts: -£0.1bn
• Administration costs: £0.0bn
• Accounting revaluation risk: £0.0bn

Central net impact: +£2.0bn in 2028-29.

Behaviour and pass-through

• Low case assumes many balances are written off regardless.
• Central case follows IFS distributional logic with moderate fiscal exposure.
• High case assumes more borrowers repay enough to benefit.
• Graduate labour supply effects are likely small.
• Policy is not assumed to increase human capital.

Phasing

• 2026-27: +£0.4bn. Preparation or partial implementation.
• 2027-28: +£1.4bn. Main ramp-up year.
• 2028-29: +£2.0bn. Target-year central estimate.
• 2029-30: +£2.2bn. Continuation at steady-state assumptions.

Main source groups

• Conservative Party, "Conservatives pledge to cut student loan interest" (2026): Used to define the pledge wording, policy scope and implementation scenario being modelled.
• Department for Education, "Interest rate cap introduced to protect Plan 2 borrowers" (2026): The government capped Plan 2 and 3 interest at 6% for 2026-27 while standard terms use RPI-based rates; defines the current student-loan baseline.
• Institute for Fiscal Studies, "Options for changing Plan 2 student loans" (2026): IFS says the Conservative Plan 2 proposal cuts balances for higher earners but not most monthly repayments immediately; used for distributional and fiscal caution.
• Office for Budget Responsibility, "Economic and fiscal outlook: March 2026" (2026): The OBR forecast sets the macro, borrowing and receipts baseline used for broad fiscal context; prevents treating tax cuts or spending changes as self-financing.
• Lochner and Monge-Naranjo, "Student Loans and Repayment: Theory, Evidence and Policy" (Handbook of the Economics of Education, 2016): Student-loan design affects insurance, repayment burdens and taxpayer exposure; relevant to capping Plan 2 interest.
• Dynarski and Scott-Clayton, "Financial Aid Policy: Lessons from Research" (NBER, 2013): Student aid is most effective when simple and targeted; poorly targeted subsidies can have high fiscal cost; relevant to graduate loan-interest subsidies.
• Conservative Party, "Our Plan for Britain" (2026): Used to define the pledge wording, policy scope and implementation scenario being modelled.