Student Loan Revisions Generate £679 Million Treasury Windfall
Recent alterations to Plan 2 student loan conditions are projected to produce a surplus of approximately £679 million for the Treasury, according to a comprehensive new report. The analysis by London Economics indicates that for students commencing undergraduate studies in the 2022/23 academic year, modifications implemented since 2022 will save the Treasury over £5 billion compared to the previous system.
Disproportionate Impact on Lower and Middle-Income Graduates
Researchers have determined that the changes have imposed a more significant burden on graduates with lower and middle incomes, while those with higher earnings have been "almost unaffected by the changes." The report reveals that graduates from the 2022/23 entry cohort earning £40,000 or more will repay an additional £740 in 2032 compared to the terms that were in place less than a year before they began their studies.
Dr. Gavan Conlon, partner at London Economics, explained that adjustments made in 2022 account for roughly £4.6 billion of the increased repayment costs for graduates, with the recent freeze contributing £1.3 billion.
Specific Changes to Plan 2 Loan Terms
Plan 2 student loans encompass those taken out for undergraduate courses and Postgraduate Certificates of Education since September 1, 2012, in Wales, and between September 1, 2012, and July 31, 2023, in England. Interest on these loans is calculated at the Retail Price Index inflation rate plus up to 3%, contingent on graduate earnings, resulting in a current maximum of 6.2%.
The repayment threshold will be frozen for three years at £29,385 starting April 2027, following autumn budget revisions. This freeze means more graduates will commence repayments earlier. Once graduates exceed this threshold, they are required to repay 9% of their income above it.
Political and Student Response
Amira Campbell, president of the National Union of Students, criticized the government's approach, stating, "Successive governments have made a calculated choice – to profit off young people who were told university was the best option. Unfairness is baked into the current student loan system, where the poorer you are, the higher debt burden you face."
Campbell added, "These past few months, we’ve seen a reckoning that young people will not stand by while politicians play with our debt and change the terms of a loan we signed before we could vote."
Proposed Alternative System
The NUS and the Higher Education Policy Institute have proposed an alternative student loan system featuring stepped repayments, which they claim would be nearly cost-neutral for the government. Under this proposed framework:
- 3% repayment rate on earnings between the tax threshold and £27,570
- 5% on earnings between £27,751 and £42,570
- 7% on earnings between £42,571 and £57,570
- 3% on any earnings exceeding £57,571
Analysis by London Economics suggests this system would result in "only relatively small differences" in lifetime repayments compared to the current Plan 2 system but would be slightly more progressive by improving affordability for lower-earning graduates while requiring higher earners to repay more.
Government Defense and Additional Measures
A government spokesperson defended the current system, noting, "We inherited the student loans system, including Plan 2, which was devised by the previous government. This Government has increased the repayment threshold for Plan 2 loans twice in the past two years – the first increases since 2021 – and we heavily subsidise the student finance system."
The spokesperson also highlighted measures to address concerns about inflation, stating, "We’re capping the maximum interest rates on Plan 2 and 3 student loans at 6% from September 1, for the 2026/27 academic year, delivering stability and protections for graduates from escalating student loan interest."
Broader Implications and Inquiry
Rose Stephenson, director of policy and strategy at Hepi, emphasized the broader implications, stating, "The reality is that today’s graduates are being asked to shoulder more than those who came before them. That raises questions about intergenerational fairness and is contributing to a growing psychological burden as debt levels climb ever higher."
Stephenson warned, "Moving the goalposts after the fact, particularly in ways that leave graduates worse off, is not just poor policy; it risks breaking trust in the system altogether."
The report was commissioned by NUS and Hepi following the Treasury Committee's announcement of an inquiry into the fairness of the student loan system. The inquiry's call for evidence closes on April 14.
