More than 2.5 million students will pay 0% rate of interest on their loans from September, the government announced yesterday.

Hopes were raised last month that students would effectively earn money on loans after the Retail Prices Index (RPI), to which they are linked, dropped to -0.4%.

The Student Loans Company (SLC), which manages the government's financial support for students, said the decision had been taken because student loans are already well subsidised, and it would be difficult to justify to taxpayers a situation whereby students take out loans in 2009-10 and have their balances immediately reduced.

The 0% interest rate for the next academic year will mean no change in borrowers' monthly repayments, but graduates will pay off their loans quicker than they would have done if interest was being added to the loan.

In a statement, the SLC said: "Borrowers repay 9% of their earnings over the income threshold of £15,000. Whatever the rate of interest is, that monthly repayment will not change."

The new rate will affect those with outstanding student loans taken out after September 1998 as well as applicants for both maintenance loans and tuition fee loans in the current and next academic year.

But loans taken out before 1998 will attract a negative rate of interest of -0.4%.

These loans are repaid through a fixed term, "mortgage-style" scheme, where the interest rate is linked solely to the RPI, making the interest rate for September 2009 to 31 August 2010 -0.4%.

Wes Streeting, president of the National Union of Students, said: "We are pleased that the government has listened to the NUS's concerns about how badly graduates are being affected by the current economic crisis.

"In the context of a recession, this is the best deal students and graduates could have expected."

He said the NUS would continue to monitor student loan interest rates and make sure ministers were aware of students' concerns.

"In addition, we repeat our call for the government to look carefully at the issue of the rate used to calculate interest on student loans, in the forthcoming wider review of higher education funding and student support," he said.