What is behind the growing anger over plan 2 student loans and what could reforms mean for graduates?
Pressure is mounting on the government to reform the student loans system, with politicians and campaigners increasing calls for change, and a minister acknowledging issues with the current arrangement.
Yesterday, consumer champion Martin Lewis engaged in a live TV discussion with the Conservative leader, highlighting the intensifying debate.
The row seems to be snowballing…
Indeed, over recent days both the Conservatives and Liberal Democrats have presented proposals to address what they describe as an "unfair" system. On Sunday, Education Secretary Bridget Phillipson indicated plans to assist graduates burdened by escalating debts.
Simultaneously, organisations such as the National Union of Students have voiced strong concerns, stating that young people who followed official guidance are now "drowning" in debt.
Why are people unhappy?
The focus is on approximately 5.8 million students from England and Wales who took out a plan 2 loan between September 2012 and July 2023.
Many graduates are repaying their loans monthly through deductions from their paychecks, but the repayments are overshadowed by the interest accruing on their debt, causing the total amount owed to increase.
The controversy intensified following a measure announced in last November’s budget. The Chancellor decided to freeze the repayment threshold for plan 2 student loans for three years.
The threshold, above which plan 2 graduates must repay 9% of earnings, currently stands at £28,470 per year and is set to rise to £29,385 in April this year. Normally, this threshold would increase annually, but Chancellor Jeremy Reeves announced it would remain at £29,385 until 2030.
This decision has led to accusations of "mis-selling," as when plan 2 was introduced by the coalition government in 2010, ministers stated the salary threshold would "be uprated annually."
How does the loan work?
Plan 2 graduates are required to repay 9% of any income above the annual threshold. For example, someone earning £38,470 would repay £900 annually this tax year, equating to £75 per month. An individual earning £48,470 would repay £1,800 annually, or £150 per month.
The interest rate on plan 2 loans is linked to the Retail Price Index (RPI) inflation rate. Currently, the RPI rate applied (up to 31 August 2026) is 3.2%. According to the money website,
"Interest accrues at RPI plus up to 3%. 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%."
The maximum interest rate is currently 6.2%.
Any remaining balance is written off after 30 years. However, by that time, graduates may have repaid significantly more than the original amount borrowed; some have estimated repayments totaling between £100,000 and £150,000 over 30 years, compared to initial loans of £60,000 to £70,000.
What are the Tories and Lib Dems proposing?
The Conservative Party has proposed capping interest charges at RPI only, arguing this would save many borrowers thousands of pounds over their lifetime repayments.
However, Martin Lewis told Badenoch this approach is flawed:
"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 have suggested several changes, including reversing the decision to freeze the salary threshold and raising 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 graduates, the income required to reduce their plan 2 debt is above £60,000 annually, and for some, considerably higher. This is partly due to the typically large outstanding loan amounts, often exceeding £50,000.
The exact figure varies depending on individual debt and salary, but there is a threshold where repayments surpass the interest accrued, thereby reducing the principal.
The Institute for Fiscal Studies provides a calculator that estimates the income needed for debt reduction year on year. For example, if the outstanding balance is £50,000, an income above £63,000 is required; if the balance is £80,000, earnings must exceed £84,000.
Should I make extra payments to clear the loan early?
The situation is complex.
Graduates can voluntarily make additional payments or fully repay their student loans at any time.
However, potential government reforms may alter the repayment landscape, leading some to prefer waiting before making extra payments.
Experts generally advise that only very high earners or those with strong future salary prospects should consider overpaying their plan 2 loans.
Save the Student states:
"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."
Martin Lewis notes the difficulty in calculating precise outcomes due to numerous variables but has created a spreadsheet that individuals can use with AI chatbots like ChatGPT or Gemini to estimate their situation. He comments this may provide a "rough idea."
What about parents who can afford to repay it?
The same considerations apply to parents contemplating repaying their child’s student loan.
While paying off the loan may not always be financially advantageous, some parents dislike the prospect of their child carrying a large debt and facing a 9% deduction on their earnings for up to 30 years.
Parents should first obtain current information from their child regarding the loan balance, growth rate, monthly interest, and repayments.
Some parents able to afford repayments are choosing to voluntarily pay enough to prevent the debt from increasing while deciding on a longer-term approach.
This strategy can provide a sense of control and prevent the loan balance from escalating.
Repaying someone else’s student loan is straightforward: payments can be made online without accessing the borrower’s account, requiring only the borrower’s surname and customer reference number.
