Student loan term tweaks leave some people thousands of pounds worse off – study
Repayment terms on Plan 2 loans have caused controversy, with some people describing them as a ‘stealth tax’.
Some people could end up thousands of pounds worse off due to changes to student loan terms, analysis by the Institute for Fiscal Studies (IFS) indicates.
The institute looked at Plan 2 student loans, which were issued to English students who started university between 2012/13 and 2022/23.
Students were able to borrow to cover their tuition fees and their living costs while at university.
But the repayment terms on such loans have caused controversy, with some people describing them as a “stealth tax”.
From the April after they graduate, borrowers make loan repayments of 9% of their income above a repayment threshold, which is currently £28,470.
Kate Ogden, author of the briefing, said: “The repayment terms of Plan 2 loans have changed over time. We estimate that those who started courses in 2022 can expect to repay around £16,000 more on average than if there hadn’t been any changes to the loan terms since they applied to university.
“Around £3,000 of this comes from the freezes announced by the Chancellor at the Budget last November.”
In the autumn budget, the Government announced that the repayment threshold for Plan 2 loans will be frozen at its April 2026 level (£29,385) for three years, instead of increasing with inflation. Interest rate thresholds, which determine how much interest is added to loans, will be frozen for three years.
The IFS said many low-earning graduates will not fully repay their loans, with outstanding balances being written off 30 years after they graduated.
But the institute also said that many high-earning graduates can expect to repay their loans in full, and to repay much more than they borrowed in real terms as a result of the interest added.
It said interest rates can vary between RPI (retail prices index) inflation and RPI plus 3%.
Some of the terms of these loans – such as the repayment rate (9%) and the use of RPI to set the interest rate – have not changed since they were issued.
But the repayment threshold and the interest rate thresholds (the income levels at which different interest rates apply) have been subject to “constant tinkering” by successive governments, the institute said.
Changes will affect how much graduates repay each month and the total amount they can expect to repay over their lifetimes, it added.
Ms Ogden added: “Several million graduates have outstanding Plan 2 student loans, which were issued to English students who started university courses between 2012 and 2022 (and are still issued to Welsh students).
“These are not like normal loans. The amount graduates repay each month depends on their income, with anything unpaid after 30 years wiped with no consequences for graduates. This means many lower earners will never repay more as a result of the interest added to their loans; their loan repayments may be best thought of as a tax.”
The IFS said the system does protect graduates from the “worst” problems associated with student loans in many other countries.
Countries with mortgage-style student loans, which must be repaid over a given period regardless of earnings, typically have high rates of default, with serious consequences for borrowers’ access to credit in the future, it added.
The research paper said of Plan 2 loan repayments: “While these repayment burdens are lower than in many countries which offer mortgage-style student loans, they may still make an appreciable difference to graduates’ living standards and ability to, for instance, afford mortgage repayments.”
The research document said that whether various changes “are seen as akin to changes in tax policy or as unexpected changes to the terms of a loan, there is debate about how well the system was communicated to prospective students”.
