Pressure is building on the government to reform the student loans system, with politicians and campaigners piling in, and a minister conceding there are “problems” with the current set-up.
The row seems to be snowballing…
It is. During the last few days the Conservatives and Liberal Democrats have both outlined what they would do to fix the current “unfair” system, and on Sunday the education secretary, Bridget Phillipson, was grilled about what the government would do to help graduates with ballooning debts.
Meanwhile, organisations such as the National Union of Students have been weighing in forcefully, saying that young people who followed official advice are now “drowning” under their debts.
Why are people unhappy?
The focus is on the estimated 5.8 million students from England and Wales who took out a plan 2 loan between September 2012 and July 2023.
Many of these graduates are handing over money from their pay packet every month to repay their loan, but everything that is taken is dwarfed by the interest that is added to their debt. As a result, the sum they owe is getting bigger and bigger.
The catalyst for this row was a measure announced in last November’s budget. The chancellor decided to freeze the salary threshold for plan 2 student loan repayments for three years.
The threshold, above which plan 2 graduates have to repay 9% of anything they earn, is currently £28,470 a year, and will rise to £29,385 in April this year. Normally it would have been expected to rise each subsequent tax year, but Reeves announced it would stay frozen at £29,385 until 2030.
This has triggered claims of “mis-selling,” because when plan 2 was announced by the coalition government in 2010, ministers said the salary threshold would “be uprated annually in line with earnings”.
How does the loan work?
Plan 2 graduates currently have to repay 9% of everything they earn above the annual threshold. If someone is earning £38,470, their annual repayment in this tax year is £900, which is £75 a month. Someone earning £48,470 will have an annual repayment of £1,800, which is £150 a month.
The interest rate on plan 2 loans is linked to the RPI rate of inflation. The RPI rate being applied at the moment (up to 31 August 2026) is 3.2%. “Interest accrues at RPI plus up to 3%,” explains the money website Save the Student. “As a graduate, the additional percentage is applied on a sliding scale … with higher earners (currently £51,245 a year and more) charged the full extra 3%.” Currently the maximum rate is 6.2%.
Any remaining balance is wiped after 30 years. But by that point you may have handed over much more than you originally borrowed: some graduates have calculated that they are on target to repay £100,000 to £150,000 over the 30 years, when the sum they borrowed was perhaps £60,000 to £70,000.
What are the Tories and Lib Dems proposing?
The Conservatives have proposed capping the interest charged at RPI only, saying this would result in many people saving thousands of pounds in lifetime repayments.
But Lewis told Badenoch this was the wrong plan: “Lowering the interest rate now will only help those who can clear [the debt] within the 30 years … The most direct thing that would help all students would be not freezing the repayment threshold.”
The Liberal Democrats, meanwhile, have proposed a series of changes including reversing the decision to freeze the salary threshold – they said they would raise it in line with average earnings.
How much do I need to earn to get to the point where my plan 2 debt is shrinking?
For many, it’s more than £60,000 a year. And for some a lot more than that. That’s partly because the outstanding loans are typically pretty big – £50,000-plus is not uncommon.
It will vary for each person depending on their outstanding debt and their salary, but there will be a point at which the loan repayments they make exceed the interest that is added, thereby bringing down what they owe.
The Institute for Fiscal Studies has a useful interactive tool on its website that will show you how much you need to earn for your debt to decrease in cash terms year on year. For example, it says that if your outstanding balance is £50,000, you would need to earn more than £63,000. If your outstanding balance is £80,000, you would need to earn more than £84,000.
None of this is straightforward, unfortunately.
You can voluntarily overpay or pay off your – or your child’s – student loan at any point.
However, ministers may be forced to announce some kind of change that could ease the situation, so some may want to hold tight and see how this all pans out.
Many experts argue that pretty much the only plan 2 people who should be overpaying their student loan debt are very high earners and those with very strong salary prospects ahead of them.
Save the Student says that in most cases it “won’t make financial sense” for graduates to try to clear their loans early. “As many graduates will eventually have some or all of their balance wiped, clearing the debt early could cost more in the long term. Therefore, if a graduate has a large lump sum of money available or extra income going spare each month, it’s usually wiser to put it towards a house deposit or other debts,” it says.
Lewis says it is impossible to work it out accurately because of all the variables and assumptions, but he has produced a template prompt that people can cut and paste into an AI chatbot such as ChatGPT or Gemini and then fill in their details. This may help give people “a rough idea,” he says.
What about parents who can afford to repay it?
The above also applies to parents who may be thinking of paying off their child’s student loan debt.
For some, while paying off the loan might not necessarily make sense in pure financial terms, they hate the idea of their child being yoked to a ballooning debt and being hit with a 9% extra tax on their pay for up to 30 years.
The first thing parents should do is get their child to provide them with up-to-date information about how big the debt is now, how fast it is growing, how much interest is being added each month and (if applicable) how much they are repaying each month.
One option being explored by some parents who can afford it is – for now – voluntarily repaying just enough to ensure that the debt is at least not getting any larger while they work out what they might want to do.
This is also a way of feeling more in control, and means you and your child are not watching the oustanding sum get bigger and bigger.
It is very easy to pay money off your child’s student loan: you can make a repayment towards someone else’s loan without even signing into their online account. You just need the person’s surname and customer reference number.
