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Conservative leader Kemi Badenoch has announced that her party plans to reduce the interest rates applied to certain student loans issued between 2012 and 2023. Speaking in the Sunday Telegraph, Badenoch described the Plan 2 loans from this period as feeling “like a scam” to many borrowers. Approximately 5.8 million individuals took out these Plan 2 loans during that timeframe.
Currently, interest on student loans is calculated at the Retail Prices Index (RPI) plus up to 3%, depending on the graduate’s salary. Badenoch proposes capping this interest rate to RPI alone, which stands at 3.8% at present. She argues that this change would make it easier for more graduates to manage and repay their debts. Badenoch expressed her concern, stating, “I am horrified at what graduates today are dealing with, and this is one of the reasons millions of young people feel they’ve been stitched up.”
These Plan 2 loans were introduced in 2012 by the Conservative-Liberal Democrat coalition government, alongside a tripling of tuition fees to £9,000 annually. While these loans were phased out in England in 2023, they remain in effect in Wales. Graduates begin repaying their loans once their earnings exceed £28,470, at approximately 9% of their income above that threshold. Repayments are primarily collected automatically through the tax system.
The government has also announced that the repayment threshold for Plan 2 loans will be frozen at £29,385 from April 2027 for three years. This freeze means that individuals earning above this amount may end up making higher repayments than if the threshold had kept pace with inflation. Chancellor Rachel Reeves has defended the system, calling it “fair and reasonable,” and pointed out that interest rates will fall as inflation decreases. However, some Labour MPs, including deputy leader Lucy Powell, have criticised the Plan 2 system as “unfair” and “egregious.” The Liberal Democrats have gone further, describing the current situation as “appalling” and calling for the entire student loan system to be reconsidered
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