Student loan reform: weighing the trade-offs

Student loans have become a huge political issue this year, but how has this become such a hot political topic? These repayments are beginning to bite hard for a generation of graduates hit by changes introduced 15 years ago. In the same way that nominal wage growth combined with income threshold freezes has dragged more workers into higher tax bands, it has also dragged more and more of earned income above the student loan repayment thresholds. This means that student loan deductions are taking a growing and hefty chunk of take-home salary for a greater share of earners. The cost-of-living crisis has made this issue more acute across the income distribution and there is no end in sight, or at least very far away for most people – with the majority of current borrowers unlikely to ever repay their loans before they are written off in their 50s.  

How did we get here?  

Since the tripling of tuition fees from 2012, graduates have taken on colossal personal debt in order to go to university in England. But prospective students were re-assured not to worry, as like their predecessors, they would only start to repay back when they could afford it, with those on the new ‘plan 2’ loans making repayments at 9% initially over £21,000.  

But they should have worried, because unlike their predecessors, the amount of debt was much larger, and the debt was subject to much higher rates of interest than their predecessors – both by design (Ministers having allowed interest rates chargeable of up to RPI+3% for the highest earners) and because of high inflation we’re all so familiar with.  

Over time it has become apparent that for this generation of students, these debts by-and-large would never be repaid, with most people expected to have their debt written off 30 years after they started their course (IPPR analysis of DfE 2025). For many, the balance isn’t even going down at all as the repayments they are making are dwarfed by the interest on the debt. We have ended up with a de facto graduate tax except (i) the wealthy are excluded because their parents pay upfront and (ii) only those who started studying from 2012 have to pay it, even though they have seen lower returns from higher education than their predecessors. The merits of a graduate tax are contested and beyond the scope of this blog, but it’s safe to say no-one would design a policy that works in this way.  

So what should happen?  

The government should look at targeted relief to these graduates, but what are the options on the table? Beyond loan write-off which would be astronomically expensive and poorly targeted - the main reform options tend to fall into three main categories:  

• Reducing interest rates on the debt
• Increasing the thresholds at which debt starts to be repaid
• Reducing the rate of repayment over the earnings threshold

Interest rates

Firstly, there are options around interest rates on the debt which have been favoured by the Conservatives (BBC 2025). There is a lot of discussion here as to whether they should come down – and there is a justifiable morale outrage that the government can charge some borrowers RPI+3%, effectively profiting on people’s desire to get a university degree. There’s also the very real sickness in your stomach as you open your annual letter from the Student Loan Company only to find the balance has inexplicably grown despite ‘doing the right thing’ and making repayments – with over 3 million graduates finding themselves in that position (Parliament 2026)  

Fiddling with interest rates might make politicians feel better, but will provide very little or no relief to those who need the money right now.  That’s because unlike with conventional debt, repayments don’t vary depending on the debt level. So repayments would remain the same and graduates wouldn’t be a penny better off in the short run from such changes.  At the margins, some (better off) people who are going to pay off their loans anyway might do so sooner, but even for these beneficiaries it will be years, probably decades, before they are realised. It is not a serious response to the cost-of-living crisis both in terms of who it is helping and when it might help them.

Repayment thresholds

Secondly, there are options around increasing the threshold at which repayment starts, which is rising to £29,385 for 2026/27 and then frozen for the rest of the decade, a decision taken at the last budget which has attracted controversy. This is the preferred reform route for the Liberal Democrats (LibDems 2026).  Our analysis finds that changing these thresholds has slightly arbitrary effects, with those whose earnings are closer to the new threshold seeing the largest impact (in proportionate terms). As an illustration we have modelled increasing the threshold to £35,000  

This would mean someone on £30,000 would see a benefit of £138 per year, whereas someone on £35,000 would see the maximal increase of £588. Beyond £35,000 - the benefit remains the same in cash terms, meaning that it falls as a proportion of total earnings.  

Repayment rates

Finally, we might choose to leave payment thresholds unchanged but reduce the repayment rate, say from 9 to 4.5%. This has more predictable effects, but has the considerable downside that the benefit to earners continues to increase with income in a way which is arguably poorly targeted. Someone on £40,000 would see an annual saving of £519 (a boost of 1.3% of pre-tax income), whereas someone on £100,000 would benefit by 6 times as much in cash terms (a boost of £3,219).

In order to limit the gains at the top earners, which would be poorly targeted support -  the repayment rate could be halved to 4.5% for earnings up to the higher earnings threshold of £50,000 but remain at 9% on those higher earnings. This would mean the maximum cash benefit would be capped at a maximum of £969 a year for those on £50,000 and above, though it would introduce administrative complexity. 

It would also be more affordable change too, though it’s worth clarifying how this costs the government money given it’s about repayment of personal debt. In effect, any change to the repayment rules will affect the amount of money the government ultimately has to write off. Changes to national accounting rules since 2019 mean that government must factor in and effectively spread those costs in accounting terms over the life of the loan – to avoid the financial “cliff edge” due around 2045 when the first of the ‘plan 2’ loans will be due to be written off. It’s very hard outside of government to robustly estimate what the implications might be for current spending from making such changes but clearly this needs to be a consideration for the government.  

The bigger picture

There are other good reasons to think again about repayment rates too beyond support with the cost of living. For example, those graduates with outstanding loans earning between £29,000 to £50,000 – a significant and growing chunk of the population - are facing withdrawal rates of 42% once modest pension employee pension contributions are factored in. This could have growth implications.  

If university is increasingly associated with a debt which will follow you and impoverish you for life, it may deter some prospective students for the wrong reasons. This will have distributional consequences if some children from poorer backgrounds, already questioning whether university is really for them, are deterred more than those from better off backgrounds.

There are also wider questions to answer about university funding models, the balance of ‘who should pay’ between learners and taxpayers and how that debt should be treated, which should be firmly on the government’s agenda.  

Conclusion

Graduates are struggling and targeted policy action on repayment is justified. To provide immediate relief, ministers should look at adjusting payment thresholds or repayment rates – though if the latter it should seek to cap the earnings at which the lower rate applies to ensure better targeting and to contain costs.  

Sources:  

British Broadcasting Corporation (BBC, 2026) Tories vow to lower interest on some student loans. https://www.bbc.co.uk/news/articles/c15xwvn707xo

Department for Education (DfE, 2025), Student Loan Forecasts for England, dataset. https://explore-education-statistics.service.gov.uk/find-statistics/student-loan-forecasts-for-england/2024-25

House of Commons Library (HoC, 2025) Student Loan Statistics, Research Briefing. https://commonslibrary.parliament.uk/research-briefings/sn01079/

Liberal Democrats (LibDems, 2026) Our plan to fix the student finance system and support graduates, article. https://www.libdems.org.uk/news/article/our-plan-to-fix-the-student-finance-system-and-support-graduates

UK Parliament (Parliament, 2026), Question for Department for Education UIN  110565, tabled on 3 February 2026. https://questions-statements.parliament.uk/written-questions/detail/2026-02-03/110565