The student loans crisis is spiralling
The student loan crisis has finally made it onto the parliamentary agenda. On Thursday, the House of Commons Treasury Committee launched a new inquiry “into student loans and the broader taxation of graduates”, inviting anyone over the age of 16 to submit their experiences. Several New Statesman journalists have already contributed.
The move comes after months of mounting pressure – from individuals, the media, and the public – over an issue that has been simmering quietly for years. It concerns the changes to the student finance system made by the coalition government in 2011, affecting anyone who began a degree in England and Wales after September 2012, the so-called “Plan 2”. For a decade and a half, discussion has been limited. No longer.
Recent developments have brought the issue into the spotlight. More than 20 Labour MPs have urged the government to reform the system, with one calling Plan 2 a “mis-selling scandal waiting to unfold”. Meanwhile, the Conservatives and Lib Dems have proposed their own fixes. But where is the government? Where is Labour, for whom graduates – already frustrated with their financial circumstances – are a shrinking but critical voter base?
The Treasury Committee outlines the problems clearly: many graduates are intensely dissatisfied with the terms of their loans. The issues include high levels of debt – students now leave university with more than £50,000 in debt according to the Institute for Fiscal Studies (IFS) – interest rates above inflation, the earnings threshold for repayments (£28,470, frozen from April 2027 by Rachel Reeves in the November Budget), and the repayment rate itself (9 per cent of earnings above the threshold), which creates eye-wateringly high marginal tax rates: 37 per cent for graduates earning up to £50,000, and 51 per cent for those earning more.
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Term matters too: remaining debt is cancelled 30 years after graduation for those on Plan 2 between 2012 and 2023. Those who started after 2023 face a lower interest rate but a 40-year repayment term. For many, this system is financially suffocating.
Different parties and groups have proposed various fixes. The Conservatives suggest lowering the interest rate to RPI, reducing the total repayment burden for some graduates over a lifetime. The Lib Dems propose raising the earnings threshold in line with average earnings rather than RPI, which would slightly increase total repayments for the highest earners but reduce monthly payments immediately.
Neither proposal satisfies Rethink Repayment, a campaign for a fairer student loan system. Its founder, Oliver Gardner, 27, argues that the threshold should be unfrozen, interest capped at consumer price index, and monthly repayments reduced from 9 to 5 per cent of earnings. Combined, these measures would cost the Treasury £12bn for the final Plan 2 cohort, and £60–70bn if applied to all Plan 2 graduates. By contrast, the Conservative and Lib Dem proposals carry price tags of £4bn and £3bn respectively for 2022-23 graduates.
The politics of student loans are as important as the economics. Tweaking different parts of the system benefits different groups and carries distinct political implications. For many, the sky-high interest rate is the most egregious element. Higher-earning graduates repay far more than they borrowed, effectively subsidising those with lower earnings. Kemi Badenoch has called it unfair, describing it as a “scam.” Gardner echoes the moral argument: it is fundamentally unjust to treat young people as “cash cows”.
Iain Mansfield, head of education at Policy Exchange and a former Tory special adviser, agrees. “Perhaps students should contribute to the cost of their studies, but there is no case for charging them far more than they borrowed to fund the NHS and welfare bills,” he said. The reality is stark: graduates with the average loan need a salary of at least £66,000 before they start repaying the capital, making full repayment virtually impossible for most.
Public sentiment reflects this outrage. Ipsos polling from February shows a majority oppose any interest on student loans, with only 2 per cent supporting rates above inflation. Yet, day-to-day financial constraints matter more than interest rates alone. Many graduates prefer lower monthly payments, even if it means repaying more in total. The Lib Dem proposal to uprate thresholds in line with earnings helps, but only slightly. The IFS estimates it would reduce average lifetime repayments by £8,000, while the immediate impact for those earning between £29,385 and £31,710 would be around £210 less in 2029–30.
Labour MPs are taken aback by the sudden interest in Plan 2 from the parties that implemented it. Some express “bafflement” at the Conservatives and Lib Dems positioning themselves as saviours after 15 years of silence.
So why now? Several factors converge. The Plan 2 cohort has matured into positions of influence, including Parliament itself. The cost-of-living crisis and high housing costs amplify the economic pressures on young graduates. Treasury Committee chair Meg Hillier highlighted this “perfect storm” of challenges, from expensive housing to inadequate pensions and poor-paying jobs. Inaction risks long-term economic and social damage, she warned.
Rachel Reeves’ November Budget exacerbated the problem. By freezing student loan repayment thresholds alongside income tax thresholds, the government increased the burden on graduates. Gardner notes that linking repayments to other public spending – like the NHS – is misleading: graduates are paying for their education, not subsidising unrelated services.
Political urgency is rising. While Labour may not expect changes until the autumn Budget, pressure is mounting. The inquiry’s scope extends beyond thresholds: it questions how student loans interact with taxation and whether burdens and benefits are shared fairly across generations. Other parties are now weighing in – Reform proposes scrapping interest rates, and the Greens advocate cancelling student debt entirely.
The system’s flaws are clear. Graduates are paying for an education that may not deliver promised returns, constraining their ability to plan for the future. Any isolated tweak – like lowering interest rates or adjusting thresholds – merely shifts burdens without addressing overall fairness. True reform requires considering lifetime costs, disposable income impacts, and generational equity.
The government’s silence cannot be explained by ignorance. Reeves has acknowledged inheriting a broken system, alongside a broken NHS and prison system. But the implication is stark: graduates are low on the hierarchy of priorities. How long they remain there remains uncertain. The inquiry closes on 14 April; its findings will reignite pressure on the government.
Reform and the Greens have expanded the conversation beyond thresholds, raising questions about equity, marginal tax rates, and intergenerational fairness. Meg Hillier summed it up: “This inquiry is about fairness. Fundamentally, what we’re asking is, have the goalposts been moved in a way which is unfair to graduates?”
Young people are paying too much for a university education that may not even benefit them to the extent they were promised, which is having a knock-on effect on their life prospects and ability to plan for their futures – as well as their faith in the government and their sense of having a stake in the country. Tweaking one part of the system in isolation will merely shift the burden from one group of graduates to another. But addressing this in a meaningful way that considers not just the interest rate but the cost of the loans over a lifetime, their impact on disposable income and the extent to which they represent value for money has a price tag tens of billions.
It might not have been Labour that introduced the system, but it is a Labour government holding the parcel as the music stops and the parcel threatens to explode.
[Further reading: The public is turning against the student loans system]
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