- The Treasury Committee is set to assess the fairness of the student loans system amid recent unrest from students ahead of the planned repayment threshold freeze after April this year
- MPs will look at whether the goalposts have been moved for graduates on plan 2 student loans as a result of the freeze
- Chancellor Rachel Reeves today defended the decision to continue the freeze on the plan 2 loan repayment threshold and insisted any change would need to be ‘fully funded and fully costed’
- Graduates face an extra £250 a year in student loan deductions thanks to freeze
- Should graduates consider repaying their loans sooner?
- Will parents and other family members consider funding student fees and living expenses instead?
AJ Bell senior pensions and savings expert, Charlene Young, says:
“For a government that came to power promising to incentivise work and provide a shot in the arm for the nation’s long-stagnant productivity rates, the chancellor’s decision to freeze the plan 2 student loans repayment threshold from April was a bizarre call. It’s also not the first time the system has been tinkered with, with a three-year freeze in the repayment threshold announced in 2022 by Boris Johnson, accompanied by a change in the uplift measure from average earnings to RPI thereafter.
“It is therefore no surprise that the Treasury Committee has joined swathes of graduates with plan 2 loans – issued to students who started their undergraduate courses between 2012 and 2022 – in raising their concerns about the fairness of the proposals.
“Current interest on plan 2 loans comes in at the RPI rate of inflation plus up to 3% depending on a graduate’s earnings, while repayments for undergraduate loans are paid at 9% on earnings above the £28,470 threshold. That threshold will rise to £29,385 in April and is then slated to be frozen for three years. In practice, particularly with inflation soaring in recent years, this means that many are running to stand still when it comes to actually paying their loans back, ultimately resulting in the vast majority accepting that they may have to wait until their debt is wiped after 30 years.
“Keir Starmer has already confirmed the government will look at whether the system is fair following recent scrutiny over the upcoming freeze. The prospect of additional pressure from an influential group of MPs that form the Treasury Committee could well be enough for the government to announce yet another policy U-turn, and graduates across the country will no doubt be watching closely to see how the inquiry plays out. Although Rachel Reeves today stood behind the 2025 Budget decision and signalled that any change would only be implemented following a full review linked to a Treasury fiscal event.
What are the current plans for student loans?
“Chancellor Rachel Reeves at last year’s Budget announced a controversial plan to freeze the threshold at which around 5.4 million graduates start paying off their student loan. It has led to accusations the government has unfairly reneged on the terms school-leavers signed up to.
“So how much will the changes cost? The precise impact will depend on each individual and their own earnings, as well as future inflation over the next three years. But our estimates show that graduates could easily find themselves facing an additional £250 a year of payslip deductions by the time the threshold rises again in 2030.
“Over the lifetime of the loan that could amount to almost £10,000 of additional repayments for a graduate whose payslip includes a student loan repayment deduction for the full 30 years, although the impact is hard to predict and could be more or less depending on inflation*.
“Considering the sizeable additional cost, it is no surprise some frustrated graduates feel the government has moved the goalposts unfairly by altering the terms of the deal they signed up to, with some accusing the chancellor of acting like a loan shark.
Bad news for middle earners
“If you earn less than the lower income threshold you pay nothing. Although this freeze, which will see the repayment trigger held at £29,385 until 2030, will drag some people into the repayment net when they may otherwise have drifted underneath it.
“For those with higher incomes the changes mean an unwelcome extra deduction from their pay and the loan system begins to look awfully like a ‘graduate tax’, in some cases for the remainder of their own 30 year repayment period. The changes mean they will repay around an extra £250 a year by the time the freeze ends, and they’ll suffer from higher interest rates on the debt as a result of the freeze to boot. Those who manage to clear the loan will end up paying more in the process.
“Graduates earning higher salaries are already clobbered by marginal deductions from salary over 50% – income tax at 40%, NI at 2% and student loan deductions of 9% – meaning they lose £51 from a £100 pay rise. To put things in pounds and pence figures for recent graduates aspiring to a successful career, median pay in London is on course to exceed £60,000 by 2030 when the student loan repayment freeze ends**. A graduate who went to university during the pandemic and took a plan 2 loan, who now works in London and progresses their way up to a £60,000 salary around their 30th birthday will be looking at income tax of around £11,500, National Insurance of £3,200 and student loan deduction of £2,800. Once you factor in a modest 5% personal pension contribution, take home income slips below £40,000 a year.
“The overall impact of forcing graduates to pay more does mean those with higher earnings expecting to clear the balance will be free of the burden sooner and see a reduced lifetime cost of student debt. Although most people in this position will see that as slim comfort, since they have the opportunity to make voluntary repayments to clear the debt sooner on their own terms anyway.
“The worst pain is felt by the rump of graduates in the middle of the income scale. For those that never repay the loan but endure the cost of higher repayments over 30 years, this change is very bad news.
“Our analysis shows it could cost close to £10,000 in additional repayments in absolute terms over the lifetime of the loan, although the cost is highly uncertain since it depends on future earnings growth, the remaining term until the loan is written off, future inflation and any government policy changes that may or may not be enacted further down the road.
“Many will feel betrayed by these changes, having taken out what they felt was a loan with fixed terms and conditions that is now being treated as a tax the chancellor can tweak to help balance the books. Both the Conservatives under Boris Johnson, and now Labour, have seen fit to alter the terms of the deal. The claim this is all in the in the name of ‘fairness’, the same arguments made to support income tax threshold freezes that punish middle earners, simply will not wash.
“Some of the graduates that have been worst affected by Reeves’ new freeze and previous policy measures under the Conservative government were also students during the Covid pandemic. Access to specialist and shared facilities was restricted and students were taught online, rather than getting the benefit of face-to-face lectures and small group tutorials, while still having to stump up fees of over £9,000 a year.
Clear the debt sooner
“There are around 5.4 million graduates who went to university between 2012 and 2022 and hold a plan 2 student loan. The government’s changes move the dial on their student loan repayments and will leave some questioning whether it has tipped the scales in favour of paying off the debt quicker to avoid the higher repayments or the burden of five figure borrowing against their name.
“This is not an easy question to grapple with as it depends on your own circumstances, how long you have remaining on the 30 year repayment term, future earnings and inflation.
“The high interest rate on plan 2 loans means there’s a significant incentive to clear the loan quickly. But you want to avoid shooting yourself in the foot by paying more than you would letting the loan run its course until it’s written off.
“Those who have been in work longer probably have a clearer idea of where their career may take them, giving them a better grasp on when they might wipe the debt through salary deductions. That information makes it easier to weigh up the pros and cons of paying off a student loan early.
“As a rough guide, at around the £60,000 salary mark graduates with a £50,000 balance on a plan 2 loan start paying back the capital on the loan. Once earnings exceed this level it becomes increasingly likely you’ll repay the debt before it is written off, so there’s a stronger case for freeing yourself of the student loans company quicker if you can.
“Below this salary level you need to weigh up carefully whether clearing the debt is worth it or not. If you’re earning £40,000 and don’t expect your earnings to grow significantly above inflation then you may find the upfront cost of clearing the debt isn’t justified.
“The answer will change from person to person depending on how long they have left on their loan, the outstanding balance and their future earnings.
Paying student fees upfront
“Those going to university now will be looking at what’s happened to graduates with a plan 2 loan and wondering whether their own plan 5 loans will take a similar turn. It may prompt some to wonder whether it is better to pay upfront.
“Anyone in the fortunate position of weighing up whether to use family money (or their own cash) to fund university costs upfront has an impossible decision ahead of them.
“It’s nigh-on impossible to work out whether you’re better off paying your own way at the start of university or repaying your loan when you graduate, either entirely or in chunks of money, or if it’s better to use that cash for something else. It all depends on your starting salary, how much of a pay rise you see over your career, whether you take any career breaks or whether you work part time at any point. It also depends what future governments do with the interest rate you pay on the debt and the threshold for repayments.
“Frustratingly for graduates, they can’t look into the future to see what their earnings will be and whether it’s worth paying upfront.
“You’ve also got to consider what else you could do with that money. If you had a pot worth £45,000 available to use, you could invest it instead. If you got a 5% return a year, after 10 years it would have grown to almost £73,300 and after 15 years it would be worth £93,500. That is a significant pot of money to use for other purposes, whether that’s buying a first property, for retirement, or any other purpose.
Plan 5 loans
“Parents and grandparents with children going to university over the next few years will be looking at these changes nervously.
“The worry will be that these plan 2 student loan changes open a can of worms, creating a precedent that emboldens future governments to move the goalposts on a plan 5 loan as well. That may be enough to convince some parents it is better to alleviate their children from student loan repayments, boosting their children’s take-home pay in the process.
“As a reminder, plan 5 loans have a lower starting repayment threshold, at just £25,000 a year, barely topping the full time equivalent of the national minimum wage from next April. The maximum term is also much longer – only being written off after 40 years from the point they are eligible for repayment, versus the 30 years for plan 2. But the interest rates both when students are at university and when earning are lower, standing at RPI across the board.
Should parents help children avoid a student loan?
“Whether you’re thinking of helping children clear an existing loan or avoid the need to take one out in the first place, there’s a lot to consider. While student loans can be expensive for some, many people will pay back less than they borrow, meaning there is no point in clearing the debt.
“First and foremost, don’t put yourself or your family in a precarious financial position. If you’re stretching yourself, or even considering taking out other loans, that’s a big risk. Taking out a commercial loan, while it may have a lower interest rate, is very risky. The loan will need to be repaid come what may, unlike income-contingent borrowing through a student loan.
“If you feel you can afford to fund university costs for children upfront, or help repay their loan, then the next thing to consider is whether it is worth it financially.
“This requires some guesswork since you’ll need to think about future earnings after graduation. Those who go on to work in high earning professions are likely to repay the cost of their degree and the interest that’s added on top. The latter can be avoided by incurring the cost upfront. But shelling out tens of thousands of pounds now could prove costly in the long run if your children work in a profession with limited earnings.
“Ultimately, many people will decide to hedge their bets with children funding university through a student loan initially and then keeping some cash in reserve so that they can weigh the benefit of making voluntary overpayments later on.
“If by their mid-20s it seems that clearing the loan early would be a sensible move then parents could gift children the cash to make voluntary overpayments and clear the debt. Obviously, that involves a transparent and ongoing discussion with children about their earnings and financial position once they start their career.
“Investing over the long term for your children’s future gives you the opportunity to support them financially. If you’ve got young children and are worried about education costs in the future, having a pot of money invested now could give you options when they come to think about higher education and a career. You’ll be able to decide whether you want to use that money to fund their education, or whether it’s better to support them in other ways like helping them with a mortgage deposit.”
*AJ Bell calculations based on 3% RPI and no further policy changes to plan 2 student loans.
**Source: ONS. Annual full-time gross pay 2025 London median, £49,692. Assumes current 4.7% growth continues to 2030.
