Young Labour MPs team up to force chancellor’s hand on student loans

Labour backbenchers are hoping to force a change to the student loans system, amid a backlash against the freezing of the repayment threshold – the amount graduates must earn before they start paying back the money – in November’s budget.

Last week, personal finance expert Martin Lewis attacked chancellor Rachel Reeves’s decision to freeze the threshold at which plan 2 student loans would start to be paid back at £29,385 for three years, starting in April 2027. It was “not a moral thing”, he said. Students pay 9% of their earnings above this figure, so the repayments rise along with their salary.

Those on plan 2 loans – taken out by English and Welsh students who started undergraduate or PGCE courses between 1 September 2012 and 31 July 2023 – face above-inflation interest rate increases. This would result in some people owing more years after leaving university than they did on graduating, despite having paid off thousands of pounds. Lewis urged chancellor Rachel Reeves to “rethink” her plans.

But Reeves told BBC’s Newsnight that the measures were “fair and proportionate” for getting “the balance right between tax and spending”. The universities minister, Jacqui Smith, also defended the government’s approach as “fair”, citing the salary premium graduates enjoy.

However, Labour MPs – particularly the younger 2024 cohort – are looking at other options. One backbencher who is in favour of reducing student loans argued that to do so would tackle the issue of the cost of living and intergenerational unfairness: “My argument is: why did [prime minister] Albanese kill off the Greens [in Australia]? It’s because of his student loan reforms. He took a slice off overnight and it restored his fortunes.”

Alex Stanley, vice-president for higher education at the National Union of Students (NUS), said: “There is significant disgruntlement, particularly among the younger cohort of MPs, who have themselves been let down by this system… There are also MPs with universities in their constituencies, which are often the second biggest employer behind the NHS, who have a real vested interest in institutions performing well.”

The threat posed by Reform is underscored by rumours of a push by Nigel Farage to woo students with a promise of 0% interest rates on their loans. This is said to have “spooked” Labour backbenchers.

Reform’s manifesto in the 2024 election made this pledge, alongside a promise to “extend the amount of time graduates pay off student loans from 30 to 45 years” and “write off tuition fee debt for NHS staff over 10 years of service”.

The Green party, meanwhile, goes further by promising “the restoration of grants and the end of tuition fees”.

A recent poll of more than 2,000 adults by Labour-linked think tank the Good Growth Foundation found that 57% of respondents thought the student loan system was unfair.

As well as looking at options to reduce the amount of interest paid by graduates, a push to unfreeze repayment thresholds is under consideration as a “quick fix” to the brewing row. In addition, Luke Charters, Labour MP for York Outer, has tabled a private members’ bill (PMB) calling for loans to be paid to students on a monthly basis rather than three times a year.

The student loan repayment system works like a tax on graduates who are middle earners, says tax expert Dan Neidle. “For the top third of graduates, it’s like a loan that is paid off pretty quickly,” he says. “For the bottom third it’s a nothing, as they don’t cross the threshold [£25,000 to £28,470 a year, depending on when they studied], but for the middle group, it is absolutely a 9% tax and two-thirds of people [in this group] never pay it off.”

This rate is applied on top of any income tax, so those in the higher bracket of 42%, end up paying 51%, “which is pretty high, and if you factor in the loss of child benefit at £60,000 you are talking a very high rate indeed” – 57%, says Neidle. For those earning £100,000 to £125,000, it rises again, this time to 62%.

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