Ministers are looking at changing the interest rate or repayment threshold on student loans to defuse graduates’ growing anger over spiralling student debts, The i Paper can reveal.
The Treasury and the Department for Education (DfE) are holding talks to see if there is a way of relieving the strain on graduates who are currently grappling with above-inflation interest rates.
It comes amid warnings from university leaders that “the whole student loan system” in England is “broken”.
Graduates, now in their 20s and early 30s, who took out loans from 2012, known as Plan 2 loans, currently accrue up to 6.2 per cent interest on the balance of their student loan (this is inflation plus 3 per cent). In addition, they pay 9 per cent on their income over a certain threshold. Tuition fees were also hiked to £9,000 or more for this cohort.
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While resentment about the issue has been simmering for years, a decision taken by the Chancellor Rachel Reeves in November’s Budget to freeze the thresholds at which graduates start to repay the loans has caused anger to boil over.
The salary threshold at which repayments kick in for graduates with Plan 2 loans – those who started courses from 2012 to 2022 – will be frozen at £29,385 for three years from April, meaning many will have to pay back more over time.
A particular source of anger for these graduates is that the interest on loans is charged at the rate of Retail Prices Index (RPI) inflation plus up to 3 per cent, depending on how much someone earns.
It means that many graduates see their overall debt pile increase each year despite all the payments they make over 12 months.
Backlash growing
Ministers have been taken aback by the pace and scale of the backlash, with Labour MPs in the 2024 intake with Plan 2 loans among those venting their frustration. Criticism has not just been levelled at Sir Keir Starmer’s government, as the Conservatives did not follow through on the Tory-Lib Dem coalition’s promise to increase the repayment thresholds in line with earnings.
On Tuesday, Education Secretary Bridget Phillipson said the Government would look again at the issue but added that “there are challenges across education and government and we can’t fix everything at once”. She also claimed that graduates would only pay back £8 more a month on average.
Sources told The i Paper that talks were taking place in Whitehall to find a policy fix.
One source with knowledge of discussions said that Treasury officials were “beavering away trying to work out if there is a different combination of the interest rate and the threshold level that makes increasingly influential young graduates stop shouting at them”.
Strain between Treasury and Education department
A second well-connected source said there were strains between the Treasury and Phillipson’s department. They said: “The Treasury is trying to foist this onto the DfE as a DfE problem. It’s a Treasury problem of the Treasury’s own making.”
A former senior civil servant said that if Reeves wanted to put more money into graduates’ pockets now, she would need to raise the repayment threshold. “The only thing you can do to give people relief is to increase the threshold,” they said. “Reducing rates reduces debt but has no impact on individuals for years.”
The ex-official added that how the Government decided to deal with the issue had implications for Reeves’ broader fiscal strategy. They said: “Is Reeves’ strategy of lots of little tax rises – including freezing the threshold – rather than increasing income tax, going to fail, as she comes under pressure to reverse each one?”
Student loans system ‘broken’
Among university leaders, there are growing concerns that the entire higher education funding system is no longer fit for purpose.
The head of a Russell Group university told The i Paper: “There is a gathering head of steam about how the whole student loan system is broken and needs fixing.
“[The Government] haven’t – yet – shown any sign of recognising there’s a problem. There very much is.”
Nick Hillman, the director of the Higher Education Policy Institute thinktank, said that he expected a change of policy.
“[Ministers] either need to come out and defend the system and explain why it’s fair, if that’s what they think, or they need to change it,” he said. “At the moment, they’re not doing either.” He warned that if there was a change, “it’s going to look like another U-turn”.
Hillman said that one of the Government’s challenges was that “the campaigners are attacking the student loan system from every direction”. “Some of them are attacking the interest, some of them are attacking the 9 per cent repayment rate, and some of them are attacking the repayment thresholds,” he said.
The problem, he said, is that it would be “unbelievably expensive” to address all three, and tinkering with one part of the system would make other aspects worse.
“If you raise the threshold, it helps people in their pockets now, but their debt will grow faster because they will be paying it down more slowly. And some people are most worried about the debt,” Hillman said.
“One way to stop people’s debts growing faster than their repayments is to make them pay back more.
“In the end, I think they’ll probably have to move on the interest, because the interest is probably the most toxic bit of the system.”
‘Intergenerational unfairness’
John Blake, who was until December the director of fair access and participation at the university regulator, the Office for Students, said there was an issue of “intergenerational unfairness” with loans.
“There are people educated a single year apart who have got vastly different debt levels,” he said.
Blake – who is now director of The Post-18 Project and a professor at the University of Salford – said that while something should be done to help Plan 2 graduates, the “underlying fragility of the higher education system” merited “a much wider look” at the system’s “purposes, shape, structure, size and funding”.
The Treasury was contacted for comment.