UK Student Loans – SB or BS ?

UK Student loans, and more particularly the repayment thereof, is a hot topic in the news at the moment. 

The student body, both past and present, are all clamouring for more favourable terms, given Reeves' recent threshold freeze, the burgeoning cost of living, and progressive rises in student fees. 

There are particular concerns about the affordability of the legacy (i.e. Plan 2) scheme which still applies to all loans taken out between September 2012 and August 2023. The majority of outstanding loan balances currently fall under this plan (5.8 million loans were taken out under the scheme in total in England before it was superseded by the current Plan 5 variant). 

The terms of this legacy scheme have resulted in crippling interest rates due to the full built-in 3% surcharge above RPI, which is tapered according to salary, and applies in full to anyone earning over £50k. The prolonged payment threshold freeze renewed by Reeves in the last budget will also ensure that virtually everyone will end up paying off both the loan and the interest, unless they are permanently on benefits (or only work part time in multiple occupations - see below for more on this). 

The recent and quite prolonged spike in inflation, which resulted in interest rates well over 10%, at a time when most loan balances were still high, added to the burden substantially at the time (and of course to the size of the debt). Any further inflation spikes we see due to the effects of current Iran and Ukraine conflicts will only add to the burden, and could turn out to be quite injurious to personal finances for those affected if the war is prolonged and inflation stays elevated.

The government is under pressure to act on this, including from their own back-benchers, and many prospective students are even starting to question whether a university education is really still 'value for money' in the 2020s, given the high cost, the poor quality of some of the courses offered, and the absence of any guarantees that it will improve their job prospects. We'll take a more detailed look at this question later.

To help crystallise ideas for the prospective (or indeed the established or ex-) student already saddled with a loan, now would be a good time to take a closer look at the ‘nuts and bolts’ of the repayment side of things. 

In particular, for those already enrolled in one or other of the plans, one question that regularly comes up is:  “…Should I or shouldn't I over-pay in order to reduce the balance I owe ?...”, so I’ll attempt to provide some answers to this, and other questions.

As anyone who has been exposed to it will testify, the UK's Student Loan system is not the easiest to understand. The scheme isn’t really a conventional loan in the true sense, but a rather unhappy hybrid between a conventional mortgage-type payback loan and a government ‘tax on learning’. Student loans replaced the old means-tested grants system in the late 90s, shortly after the first Blair government was elected, and they have persisted in various different guises ever since. 

There are a number of variables in the scheme which are subject to change from year to year, and the financial outcomes for the student will differ depending on their level of income, as well as when their loan was taken out. This makes it even less comprehensible to the novice wanting some practical advice. To help put some ‘flesh on the bones’, I've generated a simulator app to model various situations and hopefully help answer the overpayment question I’ve raised above. This will allow you to model your own likely outgoings on the basis of your own personal circumstances and salary expectations.

You'll find the app on my website’s Student Loans page as an embedded Excel insert – download it and try it yourself.  I guarantee you'll be surprised...and probably quite shocked at the amount the government will be ‘milking’ from your salary payments during the 30 (or 40) year term over which you'll be repaying your loan. (NB although you can use the simulator online via Google Sheets, if you have MS Office installed, I'd recommend you download the file to your own pc – it makes for a smoother ride....)

Whatever the merits or otherwise of the scheme for the student, it’s a veritable 'cash cow' for the treasury, for sure.

I won't attempt to go through all the rules which apply to the various historical scheme plan 'variants' here - you'll find these online e.g. the government website's own section on repayments .

You’ll also find some additional explanation of how they work in the form of comments within the app itself (look out for the red triangles at the corner of the green input cells). 

How do today's loans 'stack up' as far as repayments go?

Let's take a quick look at the figures the calculator comes up with for an 'average' post-course £50,000 loan balance with the current earnings threshold of £25k and a 9% p.a. repayment rate, and using the current (Plan 5) rules. If we do this, it becomes immediately apparent just how much the interest, and thus the debt balance (the amount displayed on the y axis of the graph) builds up over the years with the current RPI 'average' value of 3%. Mercifully, you don't have to pay this interest back every month, but it does accrue in your loan balance. Note also that, contrary to a widespread misconception, interest starts to accrue as soon as your payments start coming in at the beginning of your course (and not just when finish your course or start paying the loan back).

A typical additional question asked by students during their course might be: "I’m expecting to be quite hard up after I finish the course and when I first start working, particularly if I can't find a suitable permanent job quickly - what can I do to minimise my repayments and the interest I'll also end up paying ?"

Here are some recommendations on strategy for minimising your payments once you finish your course and your earnings rise above the salary threshold (note that you won't be required to pay anything back until then):

 Plan 5: This is the current plan, and is applicable to any loans started after August 2023. As you might expect, the scheme is designed such that middle earners (i.e. those earning a pre-tax salary in the range between £30k and £60k during the full loan payback period) will be required to repay the whole of their loan plus all the interest accrued. As we’ll discuss later, Reeves’ recent freezing of the payment threshold will ensure that even very low-income ex-students will end up paying virtually everything by the end of the extended 40 year-term of this plan; this is one of the main criticisms from the scheme’s more recent ‘victims’. The inevitable gradual rise in the minimum wage over the 40-year currency of the loan, and of salaries generally, will also take its toll on any anticipated write-offs.

 Middle range earners (£30k-£60k): This is probably the group of potential ‘customers’ with the largest membership. The only reason for making extra payments for those in this group would be to pay off the debt more quickly and thus minimise extra interest accrued over time. To make this worthwhile, a substantial extra payment (e.g. £250 monthly) would be needed to make a significant impression, since the majority of the interest burden lies during the early years, before much of the initial balance has been paid off. Paying this amount extra each month would save ca £26k in interest by paying off the loan in ca 11 years rather than the 35 years it would otherwise take, but the snag is that an extra outlay this large (amounting to ca 12% of your gross pay cheque if you're on minimum wage) might not be affordable early on in your career.

 Lower income range earners: For an earner at the low end of the scale e.g. £25k-£35k expected range, a significant amount of the residual debt would be written off under Plan 5 (ca £35k) and total repayments would only amount to ca £18k. Thus the strategy for this group should be to avoid 'throwing good money after bad' by paying out any extra. A further reduction in repayments due could also be achieved by splitting work into more than one employment (this is quite common for those early in their careers and working part-time nowadays). Repayments are assessed on each employment separately, thus you could still earn up to £24999 from each of 2 separate jobs and still repay nothing, since both employments would be below the £25k threshold. (Note, though, that as we’ll see later, the minimum wage will have almost reached the lower threshold for a full-time worker by April 2026, and will no doubt actually rise above it well before the end of this parliament, thus you would start repayments almost immediately if in full time work.)

 Higher range earners: For anyone lucky enough to start their first job on £40k+, the position is more clear-cut - you'll inevitably have to repay the whole of your loan within the 40-year write-off period because of your higher salary level. Thus your strategy should always be to pay off the remaining debt as quickly as you can afford to (or better still avoid using the scheme at all!). Someone starting at £40k and finishing at, say,  £80k would normally take ca 22 years to pay off their debt, accruing nearly £20k in interest. Paying extra off at our suggested figure of £250 per month would save them ca £11,500 in interest and pay off the debt 13 years sooner. 

Those lucky enough to have access to the 'Bank of Mum and Dad' or equivalent and able to pay off the whole balance via a lump sum would do even better; and any 'compensation' paid to the parents and/or other obliging relatives as an alternative to loan interest would also remain in the family, and would be tax-free up to the £3k p.a. gifting allowance i.e. Mum & Dad Inc. could get up to 6% return tax-free on our average £50k loan balance. (The loan 'investment' itself would also probably not be liable for IHT either, since the cash would effectively have been spent in paying off the loan; if it were regarded as a gift by HMRC, it would in any case be subject to 100% taper relief under current current gifting rules, provided both parents died more than 7 years after paying the loan off.)

Plan 2: This is the 30-year repayment 'legacy ' scheme which only applies to student loans taken out between 1st September 2012 and 1st August 2023 (although I believe it's still being offered in this form by the current Welsh government).  If you are unfortunate enough to have been landed with one of these, you'll probably still be paying it off, so would be advised to check your loan account to check your current balance remaining and payments before using the modeller. 

Although your strategy should be broadly similar to Plan 5, the shorter payment term would be expected to increase the likelihood of significant write-offs for some low salary earners. The higher repayment rates required are designed to compensate for this. The higher salary threshold will also help those on very low incomes by reducing payback liability during the early years. Thus extra payments are only appropriate for the highest earners on this scheme, e.g someone earning £40k-£70k would accrue £40k in interest charges over 25 years, and would save themselves £26k by paying £250 pcm extra. The key difference from Plan 5 is that anyone earning over the threshold of £51245 will be liable to interest at the full RPI + an additional 3%. A larger lump-sum payoff would thus be an even better investment towards reducing the overall burden. A no-brainer, then,  for anyone who can afford it.....

But how on earth can I possibly know how much I’m likely to be earning in 40 years time ?

A good question, and one which could yet catch quite a few people out in making their estimates. The full 40 years of a Plan 5 term is a long time (equivalent to about 40 days in politics nowadays!), and assuming 'normal' inflationary pay rises, we might expect a substantial rise over a 40 year period. Given this government’s record and propensities, those working in the public sector are likely to benefit from super-inflationary rises, at least until 2029; the rest of us can probably expect at least to keep up with RPI inflation, given that wage inflation is currently still outstripping RPI by more than 1%.

Another calculation which may surprise is that the adult minimum wage of £12.71 per hour (from this April) will equate to £ 24,403 p.a. for a full-time worker, assuming a 40 hour week for 48 weeks per year (this is actually just below Reeves’ frozen £25k threshold....I'll leave the reader to work out why she has re-frozen this so conveniently!). 

If you plug this value into the calculator I’ve provided on sheet ‘Intcalcs’, you’ll see that after 40 years at an average 3% increase per year, your gross final minimum full-time income (based on your having stayed on the minimum wage) would work out to almost £80k p.a.! Even if the world calms down a bit and the average inflation figure between now and 2066 turns out to be nearer 2%, you would still be getting nearly £54k p.a. (The minimum wage stats for 2016 and 2025 were £6.70 and £12.21, respectively i.e. an 82.2% increase over 9 years or 9.1% per year, suggesting 3% is probably conservative, even in more stable times). Hopefully (!) with a degree under your belt you're more likely to be earning significantly more than the minimum wage by then, so beware of using too low an estimate for your modelling assumptions…

The querks of the system also mean that perhaps those at the lower end of the earnings scale with a Plan 2 loan should be careful what they wish for regarding any changes to the scheme....if you plug a starting salary of £29k and final salary of £50k into both plans, by year 40 you'll have paid off virtually everything under Plan 5, costing you ca £89k overall; Under current Plan 2 terms, you'd still have ca £25k to pay off at the end of the 30 year term, with a total cost overall to you of only £58k...food for thought, perhaps, for those clamouring for Plan 2's terms to be equalised with Plan 5. You might actually end up paying a lot more overall...the clue is in the length of the term over which you'll be accumulating interest on your remaining balance.

Should I go to 'Uni' ?

 Last but not least, we should perhaps widen the discussion to address the thorny question of whether a university education still value for money, and all it’s cracked up to be….and, more to the point, whether it's worth saddling yourself with a working lifetime of debt repayments to get one.

 Sadly, there are already quite strong indications that it may not be…no longer is a 2:2 or better in more or less any subject from a red-brick university virtually guaranteed you a passport to a good job and a successful career – there is simply too much competition from within our burgeoning population for that to be a given. 

Although our overall birth rate in UK is actually now falling, our population is still rising, due largely to the recent surges in mass-immigration. The fee anomaly between overseas and home students has also affected UK universities' admissions policies by favouring those from overseas, and governments have so far been reluctant to step in to curb this blatantly unfair practice by restricting student visas (which are then often overstayed). There are also too few roles left offering stable careers, now that industry is 'on the ropes' after the 2 recent calamitous budgets. 

Another problem for new starters is that, however good your degree result, today’s employers nowadays also want, and will usually favour, 'ready made' applicants with at least some first-hand experience in the area they’ll be working in, and who can 'hit the ground running' without needing a lot of additional training. Sadly, this excludes new graduates almost by definition. Indeed, a ‘stellar’ degree result and no experience can actually worsen your prospects for some of the more menial jobs you might have to resort to make ends meet while you’re hunting for something which is more permanent, and appropriate to your skills.

 And that's not all - the other issue of concern to anyone about to start a career (or even in the middle of one!) is the effect Artificial Intelligence (AI) will have on the jobs market. At present it’s still too early to tell how extensive this will be, or what effect the inevitable AI stock market ‘bubble burst’ (we'll no doubt be seeing this shortly) will have on the pace of its development. There are ominous signs, however, that employers are already reducing staff levels in some of the more junior professional roles as a direct result of streamlining their operations by applying existing AI tools in the workplace. 

Make no mistake...very few jobs will be immune to this particular ‘tide’, so it’s well worth taking a hard look at which roles might be less at risk from AI, and seeing whether any of them would suit your own interests and capabilities. AI is here to stay, without a doubt, and firms will be forced to use it to stay ahead of the competition, so there will be no escape for 'vulnerable' occupations. Even governments will be powerless to act, given the global nature of its effects.

How safe are the traditional 'professional' roles typically associated with an 'academic' education ?  

Recent evidence suggests that the answer to this question may be ...'not very...'

After a long period where manual skills were traditionally 'looked down on' (and perpetuated into the 2000s thanks largely to Blair’s misguided efforts to get everyone onto academic university courses in the nineties and noughties...or bust) we are finally realising that we do actually need more plumbers, electricians...and particularly 'brickies'!. 

Brexit is well and truly 'done and dusted', despite Starmer's efforts to reverse it, and all the Eastern European workers we depended on so much for cheap labour in the noughties and teens have gone home to get better wages and jobs. Our government is desperate to 'Build, Baby, Build' in an attempt to meet a self-imposed, and I suspect now virtually impossible, manifesto target of 1.5M new houses by 2029 (this looks even more unlikely to be attained now that acute and preferential competition for building resource from the hundreds of new data centres required to power the 'AI revolution' has set in).

 Apprenticeships are more in demand by our increasingly disillusioned youth now, but sadly not as well-funded or supported as they should be…or as well regarded by employers.  A lot of our heavy industry, coal-mining, etc. has also now 'gone east' (or indeed west with the effect of Trump's tariffs), leaving fewer of the 'traditional' manual job opportunities to call on. The service sector that has largely replaced it, is also struggling just to to survive, thanks to Reeves' last two budgets.

Is there any hope for a new starter of getting a job ? And what would be the ideal job they should they aim for ? 

The ideal situation for a young adult in their late teens now would be to find a role they really have an interest in, which offers paid apprenticeships or internships, and which also includes training in-post and a guaranteed job at the end of it. The ‘icing on the cake’ would be the possibility of studying for higher qualifications relevant to the job, and funded by the firm, provided you stay with them for a set period thereafter. You might even avoid the need for a student loan completely if you can find one of these ‘golden opportunities'!

Do I really need a degree at all, and what about higher degrees if I've already got one ? 

Some roles admittedly do require a university degree (many of these need you to go higher still academically, with many scientist posts in industry requiring a PhD, or at least an MSc, for any chance of promotion.  The medical profession is notorious for a long and tortuous period of training to reach even junior doctor (sorry, Resident) level). Even these once highly-respected and 'inviolable' professions are now also in the firing line from AI, and so are perhaps less of a ‘good bet’ career-wise than they once were. Although robotics has already come a long way, the concept of a 'robotic plumber' is still probably decades away (although I have come across one or two in the past - no names mentioned but you know who you are !). These hands-on highly skilled professions are probably safer from AI replacement than most 'white collar' roles - for now at least...

A university education will of course still give you some valuable experience of life, and even 'broaden the mind' in the process. But nowadays this really needs to be directed towards a specific goal in today's workplace to ensure it is of real benefit. 

The one thing I’d counsel any prospective student against is just drifting into a university course ‘for the sake of improving my job prospects’ or because 'my mates are all doing it, and I don't want to be left out' – there’s absolutely no guarantee a 3- or 4-year Uni course  will improve your chances, and with things as they are, you may end up 3 or 4 years older and virtually unemployable as a result, with £50k+ of debt on your shoulders into the bargain. The message is - get as much help and advice as you can, make your own informed decision about what will be best for you after thinking it all through carefully....and then stick to your plan.

When should  start thinking about my future ? 

Preparation is key to getting what you want in life, and it's important to start thinking about what you want to do much earlier than the year you actually finish school - by the time you reach your mid-teens you should have at least some idea of the career you’d like to follow after your education finishes. And you'll need to firm up on it well before starting 'A' levels or equivalent in order to get the right combination of qualifications. 

Although I realise this is a really tough call for a teenager just starting their adult life, it’s critical for ensuring your adult education follows the right path for you, and gives you a better chance of ending up in a worthwhile job that you really enjoy doing. In short, find a niche for yourself as early as possible…and go for it, but make your plan flexible enough to deal with the rejections you'll inevitably get along the way...and be prepared to find alternative pathways. 

The two key qualities you'll need above all else are persistence and flexibility....make sure you give them priority.

The Verdict

In the inimitable last words of BBC R4’s Greg Foot in his ‘Sliced Bread’ series, then, “..do we think UK Student Loans are SB (the best thing since Sliced Bread)…or BS (Bull****)?..”

On present evidence, I would definitely tend towards the BS end of the spectrum. The scheme is little more than a thinly-disguised ‘tax on learning’, and has been carefully crafted to allow Reeves’ ever more voracious exchequer to take as much more of your hard-earned cash as it can. Given its complexities and hidden pitfalls, if I were a prospective student, I would literally ‘avoid it like the plague’, at least until it's substantially reformed, and look elsewhere for my funding.

Are there really any prospects for change ?

Possibly - what might be done by its prospective and current users to remedy a system that's widely perceived to be failing ?  Not a lot for now, unfortunately, apart from adding your voice to the many online protests....and of course making sure you badger your MP with 'disgusted of Tunbridge Wells'-type emails (don't quote that as your address or they'll have an excuse not to read them). But the clamour for change is growing, and the situation at the top of government is anything but stable now, despite Starmer's continued 'head in the sand' protestations. 

No amount of junketing on the world stage will save the PM from the voter's increasing ire at home, and by June, if not sooner, (i.e. after the forthcoming local election results, are all in)…there's a distinct possibility of 'regime change', which seems to be 'in vogue' nowadays (he even seems to have fallen out with his erstwhile 'mate' Trump now). If this happens, a new, and inevitably more left-leaning, incumbent will likely revert to 'old labour' principles i.e more taxing...and a lot more spending. This could go either way with regards to loan terms (more to the point, it could also wreck our economy if the markets take fright again at any uncosted borrowing!). 

If the new regime believes that a university education is basically a luxury of the rich and should be discouraged, and therefore over-taxed accordingly, we could see a tightening of the loan terms, and possibly even higher interest and /or repayment rates. If they believe that higher education is a good thing, and the opportunity should be extended to all (a la Blair), we could see much more favourable treatment. Again, I'll leave the reader to make their own mind up which possibility is more likely.... 

We might even see another screeching u-turn by Reeves before then…there was nothing in the Spring Statement this time roud, but it does seem to be 'u-turn season' just now, with the Labour 'leadership team' busy perfecting their more specialised (and spectacular!) brand of 'handbrake' u-turns in their desperate attempts to appease their back-benchers. 

I wouldn't hold your breath on any radical changes, though - the problem is that Reeves is still obsessed with balancing the books and clinging to her self-styled fiscal rules, despite her limited future propects in the job. Amending loan terms to make them more favourable for 'well-to-do' students would be difficult enough for a right-leaning government, and is an impossible task in the face of traditional Labour ideology.

And the financial consequences could be significant. Even if the only 'tweak' in the current loans scheme was an equalisation of the interest rate terms between Plans 2 and 5 (i.e. by dropping the 3% surcharge for Plan 2), the treasury would stand to lose a considerable sum in interest revenue over the lifetime of these loans.  Assuming that most of the loans are paid off in their entirety due to salary rises and Reeves' own threshold freezes (they will all have at least 15 years to run, some of them up to 27 years), we can make an approximate calculation of the loss to the treasury.

The total outstanding balance of all English loans at the end of 2023, the majority of which were Plan 2s, according to UK.Gov statistics, was ca £205 Bn. Although the interest rate excess over RPI is tapered, if we assume that the average excess value for the 5.8 million repayers still stuck with these loans works out at around 2%, the extra interest alone would come to a whopping £4.1 Bn per annum. This could amount to nearly £60 Bn in all if we assume the average lifetime of the remaining Plan 2 loans is ca 15 years.

Reeves certainly doesn't want any new 'black holes' just now, particularly now she can't reasonably blame the Tories for them. Thus we'll probably have to wait until the new management 'sweeps the board' on cabinet appointments this summer before we see any buckling of current resolve in the face of the  clamour from all sides.....and of course, as discussed above, there's no guarantee a new chancellor appointed after the June 'putsch' would feel any different...

In short, it's probably the most profitable government 'scam' of the decade...and still going strong. The figure below shows its importance in terms of GDP - loans outstanding already account for ca 10% of our GDP, and are expected to peak at more than 20% by 2045. No wonder then that UK.Gov are at pains to make sure it's all paid back to them !

You've got to hand it to the Tories - it was a beautifully-crafted political 'IED' for Labour to fall foul of with the electorate....and Reeves even took the 'bait' nicely by not unfreezing the thresholds. One wonders how many more 'devices' they laid beneath the political sand before their electoral demise.....

As their Gorton and Denton deposit-loss debacle has just shown us, the real irony, of course, is that it won't be the Tories that benefit from the fallout in 2029...but Reform and the Greens!

 

 

First published 17.2.26 Revised 13.3.26

Update 28.2.26: In anticipation of the possibility that UK.Gov will change thresholds and /or abolish the 3% tapered surcharge for Plan 2 in response to public demand, I've upgraded the Excel app such that you can now see the effect of any such modifications. (e.g. to model abolition of the Plan 2 3% surcharge, set the upper salary limit to 50 million. This will keep the interest rate very close to RPI throughout the 30-year term).