Press Story

New analysis from the Institute for Public Policy Research (IPPR) sets out the trade-offs facing ministers as pressure mounts to reform student loan repayments for post-2012 graduates.

With repayment thresholds frozen from 2026/27, more graduates are having 9 per cent of their earnings above £29,385 automatically deducted. This means that by 2029/30, people earning £30,000 will pay £55 a year more, while those earning £40,000 or above will pay £170 more.

IPPR modelling reveals that under the current system, once tax, national insurance and pension contributions are included, graduates face effective deduction rates of between 42 per cent (for those earning between £28,470 and £50,270) and 76 per cent (for those earning between £100,000 and £125,140). This makes the case for reform more urgent than ever.

The think tank highlights that most Plan 2 borrowers will never fully repay their loans. As a result, analysis of potential changes focuses on take-home pay now rather than what many middle earners repay overall.

Reducing interest rates

Due to high interest rates, over three million graduates see their debts rise each year despite making regular monthly repayments.

However, because repayments are income-contingent rather than balance-based, reducing interest rates would not change monthly deductions. The only beneficiaries would be higher earners likely to repay in full, and the gains would materialise only after many years.

Increasing the repayment threshold

Increasing the repayment threshold would mostly benefit those earning just above it. For example, IPPR analysis shows that raising the threshold from £29,385 to £35,000 would mean someone earning £30,000 would gain £138 a year, while someone earning £35,000 would gain £588.

Beyond £35,000, the benefit remains the same in cash terms. This means it falls as a proportion of total earnings but still provides identical cash gains to many middle and upper-middle earners, limiting its progressivity.

Reducing the repayment rate

Reducing the repayment rate from 9 per cent to 4.5 per cent would have the most predictable effects. Someone earning £40,000 would save £519 a year, while someone earning £100,000 would benefit by six times as much in cash terms (a boost of £3,219). In total, this would put £5.8 billion into people’s pockets in 2026/27.

This could be made more targeted to lower earners — and more affordable for the government — by halving the repayment rate to 4.5 per cent up to £50,000, but tapering at 9 per cent for earnings above that level. This would cap the maximum cash benefit at £969 a year for those earning £50,000 or more.

Henry Parkes, principal economist at IPPR, said:

“The system is broken. Millions of graduates are paying for decades on debts they’ll never fully repay, while deductions rise as living costs soar. There are no easy answers, and every option involves trade-offs. But if the government does go ahead with reform, it should prioritise easing the pressure people actually feel in their pay packets, which makes tinkering with interest rates the least impactful measure.”

ENDS

Henry Parkes and other experts are available for interview

CONTACT

Liam Evans, head of news and media: 07419 365 334 l.evans@ippr.org

NOTES TO EDITORS

IPPR (the Institute for Public Policy Research) is the UK’s most influential think tank, with alumni in Downing Street, the cabinet and parliament. We are the practical ideas factory behind many of the current government’s flagship policies, including changes to fiscal rules, the creation of a National Wealth Fund, GB Energy, devolution, and reforms to the NHS. As an independent charity working towards a fairer, greener, and more prosperous society, we have spent almost 40 years creating tangible progressive change - turning bold ideas into common sense realities. www.ippr.org