Why millions of graduates are stuck repaying more for decades

Several million people, most of them in their 20s and early 30s, have outstanding plan 2 student loans. For students in England starting university between 2012 and 2022, these loans were the only game in town. And the pitch to those undergraduates was clear.

Tuition fees had been tripled in 2012 to £9,000 but they wouldn’t need to find the cash to pay these fees upfront. They could take out a government-backed loan and, crucially, would only make repayments if they earned a reasonable salary – if their degree “paid off”.

Students were being asked to contribute more to the cost of them going to university, making it affordable for the government to keep sending about half of young people there. But the loans would spread this contribution over many years and those who went on to earn less than a graduate salary wouldn’t have to repay. To fund this, those who earned very well – who turned their degree into a lucrative career as, say, a doctor or a lawyer – would repay more than they borrowed.

The most unpopular feature of the loans – at least if you ask high-earning graduates – is the high interest rate (up to 6.2% this year). It is this that means, unlike those who went before or after them, high earners with plan 2 loans can expect to repay more than they borrowed in real terms. But this is a feature designed in from the start. And defenders of the loans are right to point out there is still protection for the lowest earners, who are not required to make any repayments.

Anything left unpaid after 30 years is wiped, and this isn’t a bad outcome: this is the insurance built into the loans operating as intended. In many ways, the loans are working as students were promised.

But many graduates are now earning enough to be making repayments and are facing the prospect of doing so for many decades. Someone earning £35,000 a year can expect to repay £49 a month. Repayments rise steeply with incomes, so a person earning £50,000 repays £161 a month, while individuals with a £70,000 salary repay £311 a month.

And recent changes to the terms of the loans will mean graduates repay more. In the budget last November, the chancellor, Rachel Reeves, announced a three-year freeze in the threshold above which people start making repayments. By 2029-30, it is estimated this will see many repaying £22 a month more than if the threshold had risen as planned. Recent graduates may expect to repay about £3,000 more in total over their lifetimes.

These are substantial sums. They will be making a meaningful difference to graduates’ living standards, especially for middle-earners, who will be making fairly chunky repayments and can expect to indefinitely. Many will be looking to get on the property ladder and finding it harder to save for a deposit. While these loans aren’t treated like a normal debt, lenders do factor in the monthly repayments when they assess affordability. We don’t yet have the evidence on how these loans may be affecting homeownership, although these rates among people in their 20s and 30s were already falling, with financial help from parents increasingly important in determining who is able to get on the property ladder – and when.

Comparing themselves with people just slightly older will particularly sting: they faced much lower tuition fees and were typically eligible for more grants to help with their living costs, so didn’t borrow anything like as much to go to university.

Of course, many of those who went to university in the mid-2000s graduated into a recession – something we know can result in long-run scarring. But earning growth of late has been disappointing. And many recent graduates will be worrying about how well their hard-earned degree will have equipped them for a labour market reshaped by AI.

It may be cold comfort that, if AI comes for their job, they won’t have to repay their student loans.

Kate Ogden is a senior research economist, working on education, at the Institute for Fiscal Studies

Photograph by Mark Draisey/Getty