What is the real cost of student loan repayments?
When university fees were hiked to £9,000 a year in 2012, they were sold as a debt which graduates could afford to relax about. But the new reality of high interest rates underlines the enduring flaws of financing UK higher education.
The cost of higher education has become one of the most contested topics in the UK, impacting our politics, economics and social fabric.
Funding universities is a complex and hotly-debated issue, especially now as the system finds itself in crisis. While Britain continues to perform well in global university league tables, surveys show a majority of Britons have a desire for a more progressive system.
Until 1998, UK students could attend university free of charge. Reforms made by the Labour government under the Teaching and Higher Education Act 1998 introduced tuition fees at £1,000 per year. In 2004, this figure was capped at £3,000.
Under the fee system, all students would be eligible for a loan to cover their tuition and living costs (maintenance), which was repaid at 9% of their salary once their annual earnings were at least £10,000 (nearly £19,000 in today's money). So, in practice, university remained free at the point of entry.
The 2007-2008 financial crisis once again forced the question of university funding on the table. Hundreds of politicians went into the 2010 general election promising to vote against raising fees, with the Liberal Democrats being the only mainstream party with a clear pledge to scrap fees altogether.
But, as part a coalition pact with David Cameron's Conservatives, this promise became one of the most controversial U-turns in recent memory. Some argue it helped demolish the reputation of Lib Dem leader Nick Clegg, along with his party's standing among young people.
Nick Clegg apologises to students for breaking his party's 2010 manifesto pledge to abolish tuition fees — video (Copyright: Channel 4 News/ITN)
The Conservative-Lib Dem coalition government instead hiked fees once more, while reforming the system by separating it into two tiers: Plan 1 and Plan 2. Students enrolling from 2012-onwards (Plan 2) would pay tuition fees of up to £9,000 per year—or £27,000 over their entire degree course. The original fee structure remained the same for those on Plan 1, who had enrolled pre-2012.
If students had not paid off their debt thirty years after graduating, the loan would be written off entirely. Since repayments were still made at 9% of graduates' income, the amount they paid would depend on how much they earned. For example, a graduate earning £28,000 would see less taken money out of their payslip each month compared to someone on a higher salary.
A fair system?
Ever since the introduction of student fees under New Labour, the system has been divisive.
In 2023, the debt per student—comprising both tuition fees and maintenance loans—amounted on average to £45,600. This has raised concerns that the prospect of paying back a loan over decades (if at all) could deter young people from lower incomes applying to university.
On top of this is the arguable insufficiency of the maintenance loan to support students, even as the total loan debt issued by the Student Loans Company (SLC) has risen to £206.3 billion. A 2023 study found that most university students work part-time jobs to make ends meet, a reality no doubt made harsher by the scrapping of student grants (which unlike loans do not have to be repaid) by former Chancellor George Osborne in 2015.
Defenders of the system point out that the fee system, even when hiked to £9,000, has done little to discourage university applicants. Data from the House of Commons Library shows us that the number of university entrants has roughly doubled between 1994 and 2023:
Source: House of Commons Library Report, 2024
Source: House of Commons Library Report, 2024
Most students are told before applying and during their studies that the loan is unique to other forms of debt. This is essentially the message communicated by universities, such as UCL.
But figures like Martin Lewis, the 'Money Saving Expert' (above), point out that even if it's not the same as a bank loan, the loans effectively amount to a tax on graduates:
"They are demonised as debt, but under this plan they will work far more like a graduate tax [...] In practice, the majority of graduates will be paying their student loans for most of their working lives."
Lewis famously wrote to then-Prime Minister David Cameron back in 2016 after the introduction of Plan 2 fees, only to be met with a response from Universities Minister Jo Johnson saying Cameron would not reply to him directly.
At that time, Director of the Higher Education Policy Institute (HEPI) Nick Hillman argued that Lewis was not only wrong about younger people being deterred from going to university as a result, but that the system was the fairest option for future students:
"If (and it is a big 'if', I admit) the current student loan scheme is deemed to be 'unaffordable', then it does not make sense to load all the extra costs onto those who have yet to go to university because those who have already entered cannot be affected.
"If more savings have to be delivered from within the system, they can only come from past, present or future students. Hitting future students even harder than past and present ones could be more likely to affect future demand than sharing the pain."
Student protests in light of the Coalition government's decision to hike fees to £9000. Copyright: Getty Images
Student protests in light of the Coalition government's decision to hike fees to £9000. Copyright: Getty Images
"In practice, the majority of graduates will be paying their student loans for most of their working lives."
"If more savings have to be delivered from within the system, they can only come from past, present or future students. Hitting future students even harder than past and present ones could be more likely to affect future demand than sharing the pain.
But what about the interest rate?
Student debt does resemble conventional loans more closely in one aspect: the rate of interest.
Students on Plans 1 and 2 have their loans linked to the Retail Price Index (RPI) + 3%, with postgraduate loans at a fixed rate of 6%.
What RPI does is measure the cost of retail goods at a given point, which the Bank of England uses to determine the general rate of interest. The chart below shows how RPI soared dramatically in 2022:
Source: Office for National Statistics
Source: Office for National Statistics
On paper, student loan interest appears somewhat manageable, if a little steep, considering the size of the average debt. But recent events demonstrate the vulnerability of the loan interest to external forces.
Along with worldwide inflation driving RPI to 13.5% in 2022, plus the infamous 'Mini-Budget' by the Truss administration in 2022, the UK has seen record interest rate rises in the last two years. This naturally affected the amount of loan interest for student debt repayments, which led to the decision to cap the interest rate on loans taken out in 2022/23 to 7.3%—suggesting the government's aim to safeguard the loan as a manageable one. Previous loan plans were also capped at 6.3%.
Students frantically filling out UCAS applications are still facing similar fees to every group of prospective undergraduates since 2012: a maximum £9,250 per year, which extended over a three-year-course amounts to £27,750. But further changes to the repayment plan in the wake of high interest rates mean something different for those who began their studies in September 2023.
Although the repayment threshold has been lowered to £25,000 per year, additional interest has been abolished: undergraduates who started their courses in September 2023 will only pay interest in line with RPI.
At face value this policy change seems to recognise the problems inherent in the scale of student debt. The new 2023/2024 model should in theory see 61% of students pay back their loans in full, compared to 27% of Plan 2.
How Plan 5 repayment compares to previous plans. Data: gov.uk
How Plan 5 repayment compares to previous plans. Data: gov.uk
This is obviously good news for current first-year students and the next generation of graduates. But it will be of little comfort to former cohorts, especially those on Plan 2, whose fees were triple that of graduates on Plan 1, and are living with higher interest rate charges on their loans than Plan 5.
If only 27% of these graduates are expected to pay back their loans in full, we might ask: just how high can the debt grow over three decades?
A phantom loan?
How a complex system prevents students from seeing the full picture
Even if recent reforms to the system suggest that Government has acknowledged the need for change, so far the system has only seemed to compound the woes of university graduates.
The economic conditions faced by millennials, from the cost-of-living to an impenetrable housing market, plus an average annual income £1,400 less than those born ten years earlier, suggest that simply changing the system for new students is too limited a solution. Even if the debt is ultimately written-off, what is under-discussed is the real impact on those graduates' pay packets.
Lawrence Stewart, who completed his PhD in Mathematics this year, was prompted to investigate the scale of the debt due to having spent more years on average in higher education. He had himself developed a formula to calculate the impact of interest rates on the total amount owed over those thirty years he would be eligible for repayments. For professional reasons he was unable not share these, but he was, however, encouraged by the repayment calculator recently created by Martin Lewis.
I asked him to put the calculator for the test with me. In the video below, he explains the formula and guides us through the tool platform:
Interview with Lawrence Stewart and interactive walk-through of Martin Lewis' Student Loans Repayment Calculator
Interview with Lawrence Stewart and interactive walk-through of Martin Lewis' Student Loans Repayment Calculator
So, if we follow Martin Lewis' and see the loan as more of a tax on graduates, the structure of the repayment system means that even if we treat it this way, unlike income-dependent tax, it appears to benefit well-off graduates and those on very high salaries.
While earning more money is always the best strategy, there is a form of "sweet spot" that borrowers can get stuck in, Lawrence argues.
"You might be earning what seems like a healthy salary for a few years, but the rate of interest means that another graduate who has gone on to a higher salary than you—as an investment banker in London for example—they'll be paying less money in total over their lifetime, even if you both left university with identical levels of debt, because they were able to pay it back faster than you."
As a 'tax', then, the system is skewed in favour of higher earners who can pay back quickly, but as we saw earlier, the data shows that this is less than a third (27%) of graduates on Plan 2.
Diego's story
So, though the debt may be written off after 30 years (40 for new graduates), the fact remains that even if a graduate has earned enough in thirty years to pay off their £45,600 debt, their outstanding debt will amount to a figure far higher than this—especially in an era of high interest rates.
The system's technicalities also expose the current repayment model's flaws. An extreme case is that of Diego Mejias, who moved to the UK aged 17 from Spain to study Physics at King's College London.
Like many UK undergraduates at the time, he was told the loan was "nothing to worry about". Today, he is pursuing a small claims action against the SLC, over a technical error which led to catastrophic rise in his debt.
"I now technically owe £10,000 more as a result, because the company had not taken the deductions they were meant to."
Diego thought he was earning enough money to be repaying his loan, only to realise that this was not reflected on his payslip. Thinking at first it might be an issue related to his being an international student, he reached out SLC, who revealed some troubling information: due to an error processing his National Insurance details, not only had he indeed not paid off any of his loan thus far—despite being eligible—but the interest had still been accruing. "I now technically owe £10,000 more as a result, because the company had not taken the deductions they were meant to," he told me.
Seeking clarity over the situation was also a challenge for Diego. “When I reached out to them to solve this, it says they legally have 20 working days to respond, but they must have kept me waiting for at least two months. Finally, I contacted them to say that if they did not respond to me within five working days I would take them to court through a small claims process. Then they started to take it more seriously."
SLC admitted fault over the processing error, he says, and they agreed they had to repay. But the process has still not reached a resolution.
"Every time I contact them they take ten days each time to reply. It’s been five months. I can’t help but feel they are being deliberately useless, as I end up giving them pointers on what’s gone wrong and they agree with me, but then they drag the process out even further."
“It’s been a nightmare, to be honest. I have far more debt, I am only paying back interest. Things weren't explained to me transparently and I feel scammed."
The experience has been exhausting for Diego, who since graduating in 2020 has worked in the UK and is in the process of obtaining UK citizenship.
“It’s been a nightmare, to be honest. The way the whole thing was sold when I was an undergraduate was that it was this government loan with super low interest that was incredibly chilled. After this, I feel scammed. Things weren’t explained to me transparently, and now I have far more debt and am only paying back interest. Sometimes I think I would have been better off getting a private loan.”
There has been discussion around blanket forgiveness of student debt, which will not have been lost on millions of graduates who expect to never repay in full.
The Biden administration in the U.S. has written off huge swathes of debt, but the UK seems unlikely to follow this example anytime soon.
Blanket loan forgiveness is not without its flaws, however. It may be an upside for students encumbered by debt, but the irony is that the inflationary conditions which have intensified the need for a better deal for students have also increased the risk factor of writing off the loans altogether. Giving a large proportion of the working population a lot more disposable income could potentially lead to further inflation.
But the conversation does not have to be simply 'cancel' or 'keep'. There is clearly room for a subtle restructuring of the debt model. One possible solution is a variable rate which scales interest according to the borrower's tax bracket. Alternatively, debt repayments could be frozen for public sector workers so long as they work in the NHS or civil service. This could also serve as a strong tax incentive for skilled foreign workers to come to the UK to study and work.
Until then, those graduates on Plan 2 are faced with a system that is effectively a form of taxation, but one that hits middle earners more than those on salaries far above the UK average. The reality we're left with, as academic Danny Dorling suggested in 2017, is a sobering one: "students who are poor before going to university are more likely to be in debt and leave university with the largest debts, while better-off students are less likely to have debts and leave with the lowest debts."
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