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Chancellor Rachel Reeves has defended the student loan repayment system, describing it as “fair and reasonable” despite criticism over the recent decision to freeze the repayment threshold for certain borrowers. This announcement made in her November Budget set the salary level for Plan 2 student loan repayments at £29,385 for a period of three years, starting in April 2027.
Personal finance expert Martin Lewis openly challenged this policy, urging Reeves to reconsider. He argued that freezing the repayment threshold effectively treats student loan repayments like a tax, which he believes is incorrect. Lewis emphasized that student loans are contractual agreements between the government and borrowers who had limited education on these loans. He stated, “I do not think it is a moral thing for you to do to be freezing the repayment threshold in this way.”
Plan 2 loans apply to students who began their courses in England and Wales between September 2012 and July 2023. Currently, the repayment threshold for this plan stands at £28,470. By freezing this figure, individuals earning above that amount will face increased loan repayments compared to a scenario where the threshold rose in line with inflation. Graduates are required to repay 9% of earnings above the threshold, with repayments automatically deducted through the tax system starting the April following the completion of their course.
Lewis also highlighted concerns related to the impact of inflation on the interest rates for these loans. Inflationary pressures have led to increased interest rates, which can make loan repayment more challenging, even though the monthly repayment amount remains tied to income levels. Plan 2 loans carry an interest rate linked to Retail Prices Index (RPI) inflation plus up to 3% based on income, amounting to a current rate of 6.2% for those earning £51,245 or more. This is notably higher than the 3.2% rate applied to Plan 1 and Plan 5 loans, which cover students who began their studies before 2012 or after 2023. Higher interest rates slow the reduction of the principal loan balance, potentially resulting in greater total repayments over time.
The freeze on student loan repayment thresholds coincides with Reeves’ extension of the Conservative government’s freeze on income tax and National Insurance thresholds for a further three years. This policy contributes to fiscal drag, where more income becomes subject to higher rates of tax as earnings increase. Plan 2 loans were introduced in 2012, alongside a significant rise in tuition fees that raised annual costs up to £9,000 under the Conservative-Liberal Democrat coalition government
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