How student loans became a political minefield

Last Wednesday, protesters wearing shark costumes and Rachel Reeves masks gathered outside the House of Commons to raise the alarm about the student loan system.

Members of the National Union of Students (NUS) waved placards denouncing the chancellor as a “loan shark” and “Rip-off Reeves”, after her budget decision in November to freeze the salary threshold at which some repayments start. Like those who borrow from unregulated lenders, millions of graduates have suddenly found the terms of their loans revised unilaterally and retrospectively.

The backlash over a student finance system that has left many overwhelmed by ballooning debt is growing. Alex Stanley, the NUS vice-president for higher education, said student loans “have been mis-sold” and that “a broken system” has been entrenched by successive governments: “This is a generation who are already struggling to pay the bills, let alone have a conversation about taking out a mortgage or starting a family.”

People leaving university now start their working lives with average debts of £53,000. Graduates do not start to repay the loan until their income reaches a certain level, and the debt is written off after 30 or 40 years, depending on the plan, but for those saddled with repayments, the system is daunting. A typical graduate in their 20s and early 30s has to earn at least £66,000 a year before they start seeing their debt shrink.

Last month, the personal finance expert Martin Lewis urged the chancellor to rethink her decision to freeze the threshold at which plan 2 student loans start to be paid back at £29,385 for three years starting in April 2027. He said it was “not a moral thing” and the government had signed “a contract” with young people.

Reeves insisted the measures were “fair and proportionate” and the government was getting “the balance right between tax and spending”. But the row over the funding of higher education is rapidly turning into a political minefield. John Blake, former director for fair access and participation at the Office for Students, the government regulator, recently said the student loan system felt “oppressive” and “incomprehensibly unfair”.

Anger has been rising on the Labour benches in the House of Commons, particularly among younger MPs who are themselves weighed down by graduate debt. Lucy Powell, Labour’s deputy leader, has criticised the “unfair” interest rates charged on student loans. “I think the general principle [that graduates make a contribution towards their education] is fair but I do absolutely accept that there are issues around this plan 2 and the plus 3% that is particularly egregious,” she said.

Wes Streeting, the health secretary and a former president of the NUS, admitted it was “very demoralising” for graduates to see soaring balances and said a serious debate was needed about the current repayment system.

A recent poll by the Good Growth Foundation thinktank, which has close links with No 10, found 57% of Britons believe the student loan system is unfair, rising to more than 60% of those who supported Labour at the last general election and are now planning to vote Reform UK, and 80% of those tempted to go from Labour to the Liberal Democrats or Greens.

Currently almost £21bn is loaned to about 1.5 million higher education students in England every year. The value of outstanding loans at the end of March 2025 was £267bn and the government expects this figure will soar to £500bn by the late 2040s.

Official forecasts suggest that only 32% of those who started their course in 2022-23 will repay their loans in full. The proportion is expected to almost double to 56% of those who began their degree in 2024-25 after the introduction of a new system that extends the repayment period.

Higher education funding is fiendishly complicated after repeated tweaks by different governments with conflicting pressures and priorities. Under plan 2, students who began an undergraduate course in England and Wales between September 2012 and July 2023 repay 9% of their income above £28,470, with interest charged at the retail prices index (RPI) plus 3%. Loans are written off after 30 years.

Students starting a degree since August 2023 are on a different system known as plan 5. They pay 9% of income above £25,000 and interest is linked to RPI without the extra 3%. The repayment period has been extended from 30 to 40 years.

Plan 5 also substantially increases expected repayments. For every £1 spent on a graduate loan, the state is expected to cover 44p under plan 2 and 19p under plan 5. Modelling also shows that plan 5 is more regressive and high earners will repay less in total than low earners because of the way the interest accrues.

The potential solutions are not straightforward and pressure is growing on the chancellor to reverse the threshold freeze. The NUS is calling for interest rates to be reduced so that balances do not grow faster than repayments. The campaign group Rethink Repayment wants threshold freezes reversed and repayments cut to 5% of relevant income.

The National Institute of Economic and Social Research favours a graduate tax as a “fairer alternative” to the current “flawed” repayment system. It proposes an additional 3% on earnings between £12,570 and £50,270 and 5.5% on earnings above £50,270, with the 40-year repayment cap removed so graduates would pay the levy until retirement. The scheme would cost the Treasury an extra £42m a year compared with plan 5 and shift the burden towards wealthier taxpayers. But it would only apply to new students and so would not help existing graduates who are overwhelmed by debt.

Nick Hillman, director of the Higher Education Policy Institute, is sceptical about the political and practical viability of a graduate tax. “No country has a workable model we can lift and the Treasury would likely pinch the money before it reaches universities,” he said. “Moreover, you can’t levy taxes on people who move abroad. It also takes years for the money to roll in, unless you charge current graduates, but then there’s no national list of who is a graduate and who isn’t.”

Alan Johnson, who as higher education minister under Tony Blair, helped form the original loan system, believes the “eye-watering” interest rate should be lowered to help graduates manage their repayments. He also wants the government to stop using the discredited RPI measure of inflation and switch to the standard measure, the consumer prices index (CPI).

But Johnson, who is now chancellor of Hull University, said the principle that graduates, who typically earn more, should contribute to the cost of their degree was sound. “You don’t pay anything upfront – there’s nothing to inhibit you going to university if you’re from a poorer family. It’s not like credit card debt,” he said.

“If I had money to put into education, I would put it into early years.”

Blair set a target of 50% of 18-year-olds going to university, which was met in 2019. Keir Starmer has promised to ensure that two-thirds of young people should take either a degree or a “gold standard” apprenticeship.

Jo Johnson, the former Conservative universities minister, said a more educated population is the key to economic success. “When you look around the world at high-performing innovative economies like Canada, South Korea and Japan, you do see very high levels of tertiary enrolment; 60%, 70% – much higher than ours. If you want to be in that pack, then supporting universities and supporting people pursuing education of all sorts after they leave school is the right thing to do.” That also means reforming universities to ensure they are delivering the high quality education students are paying for, he added.

Listen to the Daily Sensemaker: Trapped by student debt

As calls from outside Westminster to tackle the student loan crisis grow, parties are looking to outflank each other with policy offers to address the issue, writes Catherine Neilan

Labour backbenchersThis is where the campaign to push back against uncontrollable debt levels for graduates began.  Options include tackling the interest rate charged on loans and removing the punitive additional 3%. MPs are also looking at threshold levels and considering whether to change repayment rates. A shift to a graduate tax is thought to be “too bold”, sources say.

Liberal Democrats The party that once campaigned to abolish tuition fees before increasing them three-fold is trying to regain favour with graduates. The Observer understands that they will push the government to reconsider the freezing of thresholds – this April it rises to £29,385, where it will stay for three years, acting as a type of “stealth tax”. It is understood that the party is also considering reintroducing maintenance grants.

Greens The Greens go the furthest. As well as saying the threshold freeze should be reversed and tuition fees replaced with maintenance grants, leader Zack Polanski told ITV’s Peston show that there should be “a conversation about debt forgiveness” for those stuck with large – and in some cases growing – loans.

Reform UKReform did not respond to requests for comment, but its 2024 manifesto pledged to introduce a 0% rate of interest, to “extend the amount of time graduates pay off student loans from 30 to 45 years”.

Conservatives The Tories do not yet have a policy, although sources say they are “doing a lot of wider thinking about the university system as a whole”.  They favour incentivising people to do apprenticeships when it makes more sense than a strict academic course.

Illustration by Katherine Anne Rose