Paying off a student loan is a Sisyphean challenge. I started university in 2016 and since then, my loan has gained over £20,000 in interest. I am now 28 and gainfully employed in London, but despite monthly repayments, it keeps on growing. When I was applying to university, there was only one funding option: the Plan 2 loan. This loan plan was taken out by 5.8 million people between 2012 and 2023, who were not adequately warned that the more successful they were in later life, the higher their interest rates would be.
I borrowed £48,000 in total for my undergraduate degree, but that figure has ballooned to £68,000. The interest rate has been perniciously high over the past few years and is currently up to 6.2 per cent. Some Plan 2 holders can expect to pay back double what they borrowed, and debate is swirling over whether the system is a stealth tax on graduates, or a reasonable price for an education.
In her November Budget, Chancellor Rachel Reeves announced that from April 2027, Plan 2 repayment thresholds would be frozen at £29,385 for three years. Money Saving Expert’s Martin Lewis has described this as “not a moral thing to do”, as the threshold will not be rising in line with inflation, meaning more graduates will be dragged into the repayment bracket.
Reeves has defended the student loans system as “fair and reasonable”, and even argued that the threshold freeze was necessary to help fund a reduction in NHS waiting times. Young people who barely use the health service might be irked to hear that Reeves is expecting them to prop it up, while she rolls out the red carpet for tax-avoiding tech giants like Amazon. A university degree is often described as one of the best investments in your future that you can make. But for my generation, higher education has come at an eye-watering price. After tax, rent, food and transport, those last slivers of the salary pie go straight into paying off my loan interest — leaving absolutely nothing which could be squirrelled away for the future.
Members of the National Union of Students, dressed as sharks and wearing masks of Chancellor Rachel Reeves, say the changing student loan repayment thresholds is akin to being a loan shark
Jasmine Norden/PA Wire
In 1999, then prime minister Tony Blair set a target for over half of young people to go into higher education this century. At the time, tuition fees were £1,000. By 2006, fees had tripled to £3,000 and in 2012, they tripled again to £9,000 under the Cameron government. Plan 2 loans were brought in the same year and according to government data, over 90 per cent of students who went to university between 2012 and 2023 received a Plan 2 loan. More than 80 per cent said that they had not been properly informed about the terms of the loans. Blair’s target was reached in 2017 — but at what cost?
‘A mis-selling scandal’
The Plan 2 interest rate is set at the Retail Prices Index (RPI) plus up to 3 per cent extra, which is added on a sliding scale depending on how much you earn.
Labour MP Luke Charters told Parliament that borrowers like him “were never clearly told that higher graduate earnings meant higher loan interest”. He warned that the system felt like “a mis-selling scandal waiting to unfold.”
Graduates with a Plan 2 loan start making repayments when they earn more than £28,740 a year, with HMRC taking 9 per cent of the money earned above that threshold each month.
This means that someone on a £30k salary will only repay around £12 a month, while someone on £50k can expect to pay back around £162 a month.
Twenty-nine-year-old MP Nadia Whittome wrote in a post on X that because of high interest rates, she had barely made a dent in her student debt of nearly £50,000 despite six years of repayments on an MP’s salary (currently £93,904, putting her in the top 5 per cent of earners in the UK). “What chance do other graduates have?” she asked. Incidentally, Whittome never even graduated — she dropped out of her Law degree after two years because she could no longer afford it.
For junior doctors like Enzo Biswas-Rodgers, 28, the enormous debt from a six-year medicine degree is made all the more galling by the real risk of unemployment. This is because the Government has increased the amount of medical school places at a rate that far outpaces the number of core training jobs available. “How much value is there going to university if you can’t progress in your chosen field?” he asks.
With both the pre-2012 Plan 1 loan model and Plan 5, which was introduced in 2023, the interest rate is the same for everyone. However, with Plan 2 the interest rate is dependent on what you earn, which has led to critics calling it a “graduate tax”.
Chancellor Rachel Reeves has defended the student loans system as “fair and reasonable”
PA Wire
Critics have questioned why RPI is used to set interest rates, seeing as it is a semi-obsolete measure of inflation which was replaced by the Consumer Prices Index (CPI) in 2003. Both track the price of various essentials, with the key difference that RPI also accounts for costs related to housing, which usually makes it about a percentage point higher.
The repayment period is 30 years, after which any remaining debt is written off. Everyone who earns more than the upper salary threshold, which is currently £51,245, faces RPI plus an additional 3 per cent in interest, which is worse than most mortgage rates. Some have described the system as a “middle-class poverty trap”, because those who earn just above the upper threshold will end up paying more than high earners over the 30 year period, as their salary battles the interest rate.
Bizarrely, the higher rate of RPI plus 3 per cent is also applied to undergraduates during their course, despite the fact that they have no way to pay it off. By the time I had graduated, my loan had already taken on over £5,000 of interest.
Head of the Higher Education Policy Institute Nick Hillman defends Plan 2 as both “explicable and understandable”. He argues that it would be unfair to lower the interest rates as it would place the financial burden on the taxpayer, university educated or not. In 2010, Hillman was a special adviser who helped universities minister David Willetts design the tuition fee reforms.
Hillman praises the built-in “insurance features” like the loan write off and the repayment threshold, which make Plan 2 more attractive than a traditional loan. If you are never paid above a certain level, you’ll never have to pay the loan back. He is “bemused” that Left-wingers like Whittome are kicking up a fuss and insists that the system is “progressive” because it “gets more money back from rich graduates”. This is only a minor balm for job-seeking graduates in the capital. Unemployment among young Londoners has hit a nine-year high, recent figures reveal, with the jobless rate for 16-24 year olds rising to an average of 18.6 per cent in the past year.
The ever-increasing size of student loans
Hillman’s so-called “progressive” structure can feel like a tax on success. “I started working immediately after leaving university in 2017,” says Lauren Fardon, 30, who runs Thrive Finance, a small accountancy firm. “When I started repaying my loan it was at £48,425, and now, nearly eight years on and £18,000 later in repayments, it’s at £49,493.” By her estimations, she will pay back more than double her original loan.
Fardon thinks the interest rate is far too volatile to be fair. When she was applying for student finance aged 17, she received no education about the loan, nor did she know that it would start gaining interest from the moment she took it out. She is demoralised by the fact that her loan will continue to gain interest when she goes on maternity leave in future, undoing her previous efforts to lower it. She believes that the Government should “stop taxing childbirth” and freeze interest during parental leave, as well as imposing a cap on lifetime repayments.
Saffa, a product manager at a letting agency, sees the salary-dependent interest rates as a “stealth tax”. Like me, Saffa did a postgraduate degree, meaning we both lose an additional 6 per cent of our salaries to loan repayment, while the threshold is below minimum wage at £21,000 and the interest rate is fixed at RPI plus 3 per cent. “It’s just kind of crippling,” he says.
Gibson Lover
Some Plan 2 holders I spoke to were adopting the ostrich approach and refusing to check how much they owed, while others had made their peace with the fact that they would likely never repay the loan in full. Isabel, a journalist, told me that so far this year, she had paid off £48 and been charged interest of £1,864. “It’s not something that keeps me up at night,” she mused.
The reality is that most people will not pay back the full amount they were lent. The average amount a Plan 2 student borrowed in the last decade was around £45,000. To pay back that debt, they would have to earn over £44,000 a year on average over the 30 year period after graduating. In 2024, the median salary for working age graduates (anyone aged up to 64 years old) was £42,000. So, it is only those who are consistently in the top half of graduate earners who will start to pay off any of the interest which their loan accrues — the bottom half will have it written off.
In truth, I pity anyone who wants to go into the arts or journalism with a Plan 5 loan. The interest rate is capped at RPI for everyone, meaning higher earners will be able to pay off the loan more quickly. But the 30-year repayment period has been extended to 40 years, meaning those in lower paid jobs will end up paying more than they would have on Plan 2. I’ll wager that the undergrads of today will be kicking up a similar stink in 10 years’ time.
Hillman characterises miffed Plan 2 graduates as “exactly the same as the people who voted for Margaret Thatcher to reduce taxes on the middle classes in the 1980s”. One of his big gripes is the people pooh-poohing Plan 2 who do not offer solutions. “At some point I’m sure some populist politician will put together a package. Maybe Reform will,” he says ominously.
Yet a non-partisan campaign calling for a fairer system is gathering steam. Rethink Repayment was set up by Oliver Gardner, a 26-year-old who read Economics at Oxford. “There are loads of problems with the system,” he says, citing the fact that high interest rates mean that those higher middle earners could end up paying significantly more than they borrowed. What Hillman calls progressive, Gardner sees as demotivating. “It seems like there are a lot of disincentives in the UK economy for people who want to earn a decent amount of money,” he says.
While Plan 2 loans are repaid like a tax, there is a crucial difference. “If your parents were rich enough to pay for your tuition fees, you’re not paying at all — you avoid the interest entirely,” says Gardner. “Can you name me another tax which you can get out of?”
Rethink Repayment is calling for the repayment rate to be lowered from 9 per cent to 5 per cent of a graduate’s salary, for the repayment threshold to be unfrozen, and for annual interest on student loans to be capped at the lower CPI, which is used to adjust wages and pensions.
Unlike Rachel Reeves, Gardner thinks that general taxation would be a fair way to make up the difference. “The argument that you should only be paying tax if the resultant spending benefits you is not how tax works,” he says. Moreover, everyone benefits economically from an educated workforce. Graduates tend to have higher salaries, meaning they contribute more income tax.
Student loans are just one piece in the panoply of woes that young people are facing, but Gardner believes that they’re a good place to begin. “The long term costs of not helping people make a better start in life will be really significant,” he says.
In 2010, David Cameron promised that Plan 2 would “put fairness back at the heart of our university system”. For millions of graduates with ever-growing debt mountains, fairness may seem like a rather abstract concept.