Navigating student loans
Student loans are making headlines with opposition MPs, consumer groups and student bodies calling for changes to the way they operate in England.
The controversy surrounds Plan 2 loans, issued to students starting university between 2012 and 2023. Previously, students were on Plan 1 loans, with newer undergraduates on Plan 5 loans. Scotland and Wales operate separate student finance systems.
The government’s controversial decision to freeze the repayment threshold for Plan 2 borrowers for three years from April 2027 means graduate repayments (9% of earnings above the threshold) will rise as salaries increase.
Consternation is also brewing over interest charged on these loans. While studying and until earnings reach the repayment threshold, interest is applied at the Retail Price Index (RPI). Once earnings exceed £51,245, borrowers pay RPI plus 3 percentage points. Between £28,470 and £51,245, this rate increases gradually – meaning someone earning £39,857 would pay RPI plus 1.5 percentage points.
Rates are set each year using the previous March’s RPI figure. Last year this was 3.2%, leaving higher earners facing interest of 6.2%.
With average graduate debts of around £53,000 – covering £9,000-a-year tuition fees and maintenance loans – balances can grow quickly, particularly in a higher inflation environment.
Any remaining balance under Plan 2 is written off after 30 years. However, many will still make substantial repayments over much of their working lives and could repay far more than they borrowed.
Graduates and parents considering early repayment should tread carefully. Those with the means may be tempted to clear some or all of this debt. But caution is needed. Paying off the loan in full will eliminate future interest charges, but partial payments will not impact future repayments, which are linked to graduate salaries, not the size of the outstanding debt. There is also a risk of repaying sums that would otherwise have eventually been written off.
For those entering university now, Plan 5 charges interest at RPI only. But repayments start at £25,000 and continue for 40 years – potentially creating loan repayments through to their 60th birthday.
May Bulletin 2026
This insight is part of our May Bulletin 2026. Explore all the articles:
