Student loans – a cynical scam or vital support?

Undergraduate degrees have always been expensive to provide. Throughout history, changes to grants, loans, hardship funds and tuition fees have often fuelled the fires of student activism.¹

Following the introduction of tuition fees in 1998, student loans became a common part of university life. In the early years, tuition fees were low and there was no interest payable above inflation, leading to only modest debts. As a result, the loans seemed like a sensible option – if you earnt enough to pay it back then your uni costs were worth it, but if your salary didn’t reach the threshold, you didn’t owe anything.

Recently, student loans have come under fresh scrutiny. The Times described them as a “scam” reporting that, “Rarely has there been such an egregious example of injustice perpetrated by a government against a particular section of society.”²

Why such alarming news coverage?

Today’s ‘Plan 2’ loans are different to the first student loans. With higher fees and living costs to cover, they tend to be larger. Unlike the original, ‘inflation only’ loans, interest rates are set at Retail Prices Index (RPI) plus 3 percentage points,³ resulting in rates of around 7 – 8% in recent years. At times, this has been higher than many mortgage rates.

These interest rates have resulted in debts growing dramatically, even while payments are being made. Some individual balances have been reported at close to £300,000, with millions of borrowers owing over £50,000.⁴

For many, the loans now function like a long-term, income-linked contribution or tax. Depending on an individual’s mindset, significant debt might bring a psychological as well as financial burden.

It is understandable that those with loans, or those currently considering higher education, might be concerned. We’ll unpick the facts from the fear, to help you understand the detail of student loans today.

But first, let’s analyse how the system currently works, and the impact of recent changes…

The different plans

Students can take two forms of loan, one for tuition fees, and one that is means tested and provides maintenance while at university. These are subject to interest, and repayments begin when an income threshold is reached.

Plan 1

These are the old style of loans that are largely considered fair and unproblematic, with interest matching inflation.

Plan 2

There are almost six million people on Plan 2 loans,⁵ where the repayment threshold is currently frozen at £29,385 until 2030. With salaries gradually rising, this means more graduates are pulled into repayment and paying a larger share of their income over time.

A temporary government cap in 2022 prevented interest rates rising into the mid-teens when inflation spiked.⁶ Recent political and media pressure has resulted in another temporary cap on interest rates for Plan 2 and Plan 3 loans, fixing them at 6% for the 2026/27 academic year, thus slowing the growth of balances.⁷

Plan 2 loans are written off after 30 years.

Plan 5

Under the new Plan 5 system, graduates begin repaying earlier, at £25,000, and continue for longer. Plan 5 interest rates track RPI (around 7% in recent periods).⁸

Plan 5 loans are written off after 40 years.

How it works in practice

Let’s work out the numbers in the real world, for a student who borrows £50,000 over the course of their degree. Interest begins accruing immediately, meaning the balance can already exceed £55,000 by graduation.

What happens next depends on their earnings…

Plan 2 – Lower earners

Repayments only begin once earnings exceed the threshold (£29,385), so a lower earner may pay little or nothing over their lifetime. The balance will grow significantly but will be written off after 30 years.

Plan 2 – Mid-earners

A graduate earning £35,000 would repay just over £500 a year whether they owed £20,000 or £50,000. Repayments are fixed at 9% of income above the threshold, so depend on earnings, not the size of the loan.

For many mid-earners, these repayments are not enough to cover the interest being added, so the balance will continue to grow for much of their working life. After 30 years, any remaining debt is written off.

Plan 2- Higher earners

Only higher earners, whose repayments rise into the thousands per year, are likely to clear the loan in full.

Let’s run through an example:

With a starting salary of £30,000, then strong career progression to a salary of £60,000 the graduate will move from very low repayments initially, to over £2,500 a year. Then with progression to higher earnings, say £80,000, yearly repayments would be over £4,000.

At this point, repayments exceed interest and the balance starts to fall. The loan would be fully repaid in approximately 20-25 years, with a sum of between £70,000 and £90,000 repaid.

For those that clear the original debt and the substantial interest, this is an expensive loan.

Plan 5

A graduate earning £35,000 would repay around £900 a year, compared with roughly £500 under the previous system.

So how many people repay?

For most people, under Plan 2, the large headline debt does not translate into high payments or full repayment of the loan and interest.

The Government estimates that around 20% of full-time undergraduates who studied in 2021/22 will repay their loans in full.⁹

Under Plan 5, a much larger share of graduates (a predicted 55%) is expected to repay their loans in full, even on typical professional salaries.¹⁰

As a result, Plan 5 will reduce the cost of loans for high-earning borrowers, but increase it for lower earners.¹¹

Pass notes on student loans

• • A student loan doesn’t go on your credit file, so won’t affect your ability to access other credit, however, it can be considered when working out affordability, especially for mortgages.

¹²

• Salary sacrifice reduces your taxable income, which can lower student loan repayments – so it might make sense to make those pension contributions, if available.
• Don’t forget the repayment amounts are based on income, not the overall balance.
• Focus on your long-term earning potential and career fit rather than trying to minimise the loan.
• For most, overpaying doesn’t make sense; treat it differently to normal debt.
• However, for high earners, it might make sense to overpay and clear the loan. This needs proper analysis.

Advice for parents whose children have a student loan

• Don’t rush to pay off the loan without understanding whether it will ever be fully repaid.
• Consider whether money is better used elsewhere, especially if it can grow (house deposits, ISAs, pensions).
• Support financially where it reduces higher-cost borrowing (overdrafts, credit cards) rather than targeting the student loan.

Progressive or not?

Despite the negative coverage, student loans can still be considered progressive in nature. They offer access to an expensive higher education without the upfront cost, with repayments directly linked to ability to pay. There is some nuance that is worth exploring.

First up, kids from wealthier families do have a choice about whether they take out a loan, whilst those from less well-off backgrounds don’t. Those with wealthier families might also be able to pay off the loan in full using capital, if it is financially worth doing so. Again, a choice.

Secondly, the situation for women merits some thought.

Historically, fewer women than men fully pay off their loan, reflecting that gender pay gap, as well as the career breaks and reduced hours that women are more likely to need for caring responsibilities.

Under the newer system, where more graduates are expected to repay in full, this is predicted to result in women repaying for longer and potentially more. Analysis from The Institute for Fiscal Studies suggests that women could repay around £11,600 more on average, while men repay around £3,800 less under Plan 5.¹³ Along with other structural inequalities, this might just be another invisible financial pressure for women.

Overall, the decision whether to take out or fully pay off a student loan depends on many personal factors. These include the economic climate, your expected career path, your appetite for risk, as well as your psychological approach to debt.

Understanding the nuance can certainly feel like it needs a degree! It can be helpful to discuss the best options for your situation with your financial adviser.

1. Grants, loans and hardship funds: what we can learn from the long history of student finance
2. https://www.thetimes.com/article/20b59b0d-026c-4e92-ba21-3c0deb5ad747?shareToken=c946b1e02b2d2b79b3e9a9d5ce887a0a
3. Student Loan Interest Rates | How Interest is Calculated
4. Highest student loan balance nears £300,000 as millions owe over £50,000 | The Independent
5. Bad and getting worse: for students like me, the loan system is the disaster that never ends | Rohan Sathyamoorthy | The Guardian
6. Student Loan Interest Rate History | Complete Timeline
7. UK caps student loan interest rates at 6% citing global inflation risks | Reuters
8. Student Loan Plan 5 Calculator 2026 — New Repayment Rules
9. House of Commons, Student Loan Statistics: SN01079.pdf
10. House of Commons, Student Loan Statistics: SN01079.pdf
11. Sweeping changes to student loans to hit tomorrow’s lower-earning graduates | Institute for Fiscal Studies
12. 5 need-to-knows about ‘Plan 5’ English student finance from MoneySavingExpert
13. Sweeping changes to student loans to hit tomorrow’s lower-earning graduates | Institute for Fiscal Studies