Student Loan System Faces Renewed Scrutiny as Repayments Rise
The fairness of the United Kingdom’s student loan system is under increasing pressure, with new analysis revealing that graduates on Plan 2 loans could face significantly higher repayment burdens. The Institute for Fiscal Studies (IFS) recently found that individuals on these plans are projected to repay, on average, approximately £3,000 more than previously anticipated.
The findings have sparked criticism from financial experts, including Martin Lewis, founder of Money Saving Expert.com. Despite this, Chancellor Rachel Reeves has defended the system as “fair and reasonable.” However, Health Secretary Wes Streeting has acknowledged the need for a debate regarding the current difficulties faced by young graduates.
Understanding Plan 2 Loans
Plan 2 loans were available to students from England who began their undergraduate courses between and . The introduction of these loans coincided with the rise of the tuition fee cap to £9,000 per year. Students who commenced their studies from but before the fee cap increase are on Plan 1 loans, while those starting after fall under Plan 5.
The system varies across the UK. Scottish students have Plan 4 loans regardless of the period of study, and Northern Irish students remain on Plan 1. Welsh students transitioned from Plan 1 to Plan 2 in and have continued on Plan 2 post .
Repayment Terms and Recent Changes
Graduates begin repaying their Plan 2 loans in April following graduation, provided their income exceeds a specified threshold. Currently, the repayment threshold stands at £28,470 per year, with repayments set at 9% of income above this level. The IFS notes that a graduate earning £35,000 can expect monthly repayments of £49, increasing to £161 for those earning £50,000.
Interest accrues on the loan both during study and after graduation. While studying, interest is calculated at the Retail Price Index (RPI) inflation rate plus 3%. Post-graduation, interest is linked to RPI inflation, with an additional percentage point up to a maximum of 3%, dependent on the graduate’s earnings. The full 3% interest is applied to those earning above £51,245.
A key change introduced in the recent autumn budget involves freezing the repayment threshold for three years, instead of allowing it to rise with inflation. This means more graduates will begin making repayments sooner than previously expected.
The Impact of the Freeze
The IFS estimates that the threshold freeze will result in an additional £93 in repayments in for graduates earning above £30,416. The IFS projects that the budget freezes will increase average lifetime student loan repayments by around £3,000 for those who started university in , with similar impacts expected for earlier cohorts.
Martin Lewis has voiced concerns about the fairness of the freeze, stating that it is “not a moral thing” to do. He highlighted that Plan 2 loans already carry above-inflation interest rates linked to inflation, and the freeze exacerbates the financial burden on graduates.
Loan Write-Off and Growing Debt
Student loan debt is ultimately written off 30 years after the April following graduation when the graduate first became due to repay. However, the rising debt levels and the impact of interest are causing concern among graduates.
Graduates are increasingly making voluntary repayments to reduce their debt faster. BBC analysis of Student Loans Company data shows that voluntary repayments by Plan 2 loan holders more than tripled between the financial years and , rising from £141.7 million to £491.1 million. While some graduates, like Luke England, are proactively tackling their debt, Martin Lewis cautions that only higher earners are likely to benefit from overpaying, and most should avoid doing so.
Amy Cayzer, a recent graduate, exemplifies the growing concern. Having graduated in with a first-class degree, her debt has already increased from £73,814 to £93,793 due to high interest rates, and is projected to exceed £100,000. This situation highlights the significant financial challenges faced by graduates navigating the current student loan system.
The debate surrounding student loans is likely to intensify as graduates grapple with rising debt and the implications of recent policy changes. The calls for a comprehensive review of the system, led by figures like Martin Lewis, are gaining momentum, potentially forcing the government to reconsider its approach to higher education funding and repayment.
