The Headlines
University loans in the UK
No one seems particularly happy with the current university loans repayment system. We look at why and what could be done.
By John O’Leary
"A whole generation feel bled dry by a system that just keeps taking from them." - Jas Athwal
"No one thinks that this means abolishing student loans, but there may have to be some change in the balance between public and private funding"
In brief:
- The UK’s once-admired income-contingent loan system is under fierce political pressure, facing urgent calls for reform as graduates struggle with a model increasingly described as a "debt trap".
- Frozen repayment thresholds and high interest mean debt rises even during repayment, creating a "pronounced" burden that limits graduates' financial mobility and access to the housing market.
- Proposed solutions include lowering interest rates or abolishing tuition fees entirely to find a "fairer" balance between public and private funding and ensure the sector's long-term sustainability.
England’s student loans system, which has been held up by some as a model for funding undergraduate education, is under attack from all political sides and looks set to be revamped. But the Government is yet to come up with reforms that will satisfy the growing number of critics while keeping universities afloat at a time of economic stringency.
As one of the few examples of income-contingent repayments, the scheme has had admirers internationally and defied initial predictions that it would reduce participation in higher education. Dr Andreas Schleicher, Director of Education and Skills for the OECD, for example, said last year that he regarded the UK’s combination of public and private contributions as the most advanced approach to funding higher education, although he did acknowledge that the burden on individuals had reached “quite a pronounced level”.
Numerous media reports in recent months have illustrated how pronounced it has become, especially for those on the original Plan 2 version of the loan scheme, introduced in 2012, which set interest rates at 3 percent above inflation for graduates earning more than basic salaries. Angry graduates, including some MPs, have described how their debt has continued rising even as they made substantial repayments. Those who graduated since 2023 do not face premium interest rates, but their repayments continue for 40 years rather than the 30 years required of their predecessors.
The current furore stems from the announcement by Rachel Reeves, the Chancellor of the Exchequer, in last November’s Budget, that the threshold for beginning repayments would rise with inflation as usual this year, but would then be frozen until 2030. As a result, thousands more relatively low-paid graduates will start repaying sooner than they anticipated, while others will repay more than if the threshold (currently £28,500) was increased.
Bridget Phillipson, the Education Secretary, has defended the freeze, claiming that graduates will only pay back £8 more a month on average. She said ministers would look again at the issue, but added that "there are challenges across education and government and we can't fix everything at once".
However, Sir Keir Starmer, the Prime Minister, who once promised to abolish tuition fees while in opposition, told MPs this month that the Government was looking at ways to make the loans scheme “fairer”. There was speculation that reforms might be included in the Chancellor’s Spring Statement, but this coincided with the beginning of war in the Middle East and contained no new policy announcements in any area.
A debate in Parliament revealed the extent of the opposition, even among the Government’s supporters. More than 20 Labour MPs spoke in favour of changes to the system, especially for those on Plan 2 loans. Jas Athwal, who led the debate, said the loan scheme was in need of urgent reform and "tinkering around the edges is not going to cut it". He added: “"A whole generation feel bled dry by a system that just keeps taking from them."
Although graduates never repay more than 9 percent of their salary, marginal tax rates reach 37 percent for those earning more than £25,000 and top 50 percent when salaries exceed £50,000. Such sums inevitably limit access to the housing market and have led some to take lower-paid jobs to remain below the repayment threshold.
The Conservatives, who introduced the scheme, are proposing to scrap the premium rates for Plan 2 graduates, ensuring that they never exceed inflation. They would fund the change by cutting student numbers by 100,000. Kemi Badenoch, the Conservative leader, said student loans had become "a debt trap" and interest rates needed to be reduced.
The right-wing Reform Party, which is currently ahead in national polls, has also proposed scrapping premium interest rates while increasing the repayment period to 45 years. Its overall higher education policy has yet to be announced, so its approach to student loans may change before the next election.
The UK’s devolved education system has resulted in a variety of student funding policies. Northern Irish students pay lower tuition fees to those in England, and most Scottish students do not pay any. Wales still has the original Plan 2 system, which seems set to become an important issue in the Principality’s forthcoming election.
Although the extent of dissatisfaction with the current system would seem to make some change inevitable, there is no consensus on how extensive it should (or could) be. In a highly unusual exchange on breakfast television, for example, Martin Lewis, the popular financial analyst who was due to appear in a later item, appeared on set and interrupted the Conservative leader to criticise her support for lower interest rates to advocate action on repayment thresholds instead.
Nick Hillman, Director of the Higher Education Policy Institute, who was political advisor to the Conservative universities minister David (now Lord) Willetts when Plan 2 loans were introduced, has defended the system, although he would support a change in the method of calculating inflation. Student loans and some other benefits currently use the Retail Prices Index, which includes housing and other costs and stood at 3.8 percent in January, whereas the more common measure of inflation, the Consumer Prices Index (CPI) was on 3.0 percent.
Such action would be unlikely to satisfy the critics, especially with the Green Party threatening Labour from the left. The Greens, which won a crucial by-election late last month, want to abolish tuition fees, bring back maintenance grants for all students, and cancel existing student debt to treat education as a public good rather than private debt. They describe the current system as a "burden" on graduates, and although they are not yet a force in Parliament, they will add to the pressure for more than token reform.
Higher education rarely features prominently in UK elections, and the next one is not due until 2029. But the growing proportion of graduate voters and strong media interest may make this an exception.
There are now 35 constituencies where more than half of the potential voters are graduates, and many more where the proportion is close to that mark, with students adding to the numbers with a direct interest in the loans debate.
Labour’s last manifesto in 2024, promised to reform the "broken" higher education funding system to ensure future sustainability for students and universities. No one thinks that this means abolishing student loans, but there may have to be some change in the balance between public and private funding if the Government’s waning popularity is not to be damaged further.