Student Loan Interest: What You Need to Know in 2025

If you’re juggling a student loan, the biggest pain is often the interest that keeps growing while you’re trying to pay it down. Understanding how that interest works can save you a lot of money, and it’s not as hard as you might think.

In the UK, most student loans use a variable interest rate that moves with the Bank of England base rate. When the base rate goes up, so does your loan cost, and the opposite is true when it drops. This is why you’ll see your monthly payment change from time to time.

How Student Loan Interest Is Calculated

The loan provider works out interest on a daily balance. They take the annual rate, divide it by 365, and apply that tiny percentage to whatever you owe each day. At the end of the year they add up all the daily charges and that becomes the interest you pay on your statement.

As of early 2025 the standard rate for Plan 2 loans is the lower of 2 % above the Retail Price Index (RPI) or the Bank of England base rate plus 1 %. That usually lands somewhere between 3 % and 5 % for most borrowers. If you’re on a postgraduate loan the rate is a flat 6 %.

Your repayment plan also affects how much interest builds up. If you’re on an income‑driven plan, you only pay when your earnings are over the threshold, but the loan still accrues interest during the quiet months. That means the balance can keep rising even while you’re not making payments.

Ways to Reduce Your Interest Cost

The simplest trick is to pay a little extra whenever you can. Even a small monthly boost knocks down the principal, which in turn lowers the daily interest charge. Some lenders let you set up an automatic top‑up, so you don’t have to remember each month.

If you have a good credit score, refinancing with a private lender may give you a fixed rate that’s lower than the public plan. Be careful, though—private loans often lose the income‑contingent forgiveness you’d get with a government loan. Do the maths before you switch.

Another option is to switch to a repayment‑based plan if your earnings have jumped higher than the income threshold. Paying a fixed amount based on your salary can speed up repayment and cut the total interest you pay over the life of the loan.

Budgeting helps you find the cash to make those extra payments. Track where every pound goes, cut non‑essential subscriptions, and allocate the savings to your loan. Even £20 a week adds up to over £1,000 in interest saved after a few years.

Use an online loan calculator to see how different payment amounts change the interest timeline. Plug in your current balance, the rate, and a few extra payment scenarios—that visual can motivate you to stick to a higher payment plan.

Avoid common pitfalls: don’t ignore the loan for years, because missed payments don’t stop interest from piling up. Also, don’t take a short‑term payday loan to cover your student loan payment—it will just add a higher‑rate debt on top of the existing interest.

In short, know your rate, keep an eye on the balance, and make extra payments when possible. Those simple steps can shave years off your loan and keep more money in your pocket.