Student loans: interest outruns payments for most graduates

A £50,000 Plan 2 loan balance only starts shrinking once a graduate earns about £63,000, according to Institute for Fiscal Studies research published in February. Set against a national average salary of £39,039, that arithmetic leaves most borrowers, even relatively high earners, watching interest outpace their payments.

The finding lands as the government heads into this month’s Budget with the scheme’s economics under scrutiny from several directions. When ministers froze the repayment threshold for Plan 2 loans for three years, they set off a debate about the financial position of an entire cohort of borrowers and the viability of the scheme itself: an interest rate higher than most other student loan plans, balances that climb despite monthly repayments, and a structure that only pays off for those earning well above the national average.

Three friends who met as freshers at the University of Newcastle in 2012 show how the arithmetic plays out. They arrived the same year tuition fees in England and Wales tripled to £9,000 a year and the new Plan 2 loans were introduced. Each borrowed about £37,500 over three years for tuition and living costs. This year marks a decade since the first students in their year began repaying, and their outcomes have diverged sharply.

Lizzy, who studied economics and works in financial services in Bristol, is the group’s highest earner at £85,000 a year. Last year she made the calculation that early settlement beat a decade more of interest. She estimated that on her earnings trajectory she would have taken 11 more years to repay, so she cleared the debt by borrowing from her family instead. By paying in full early she accrued less interest and expects to repay her family within four years, saving about £20,000 in the process.

Her move fits a wider trend: voluntary repayments towards student loans have been growing. But commentators caution that the strategy is only profitable for a narrow group. MoneySavingExpert.com founder Martin Lewis has warned that only higher earners benefit from voluntary repayments and that most people should not be “panicked into overpaying”. Finance journalist Holly Mead told the BBC it can make sense for borrowers confident of clearing the debt who can make “a really significant overpayment” of tens of thousands of pounds, as Lizzy did. Smaller voluntary payments, she added, could mean “you’re just voluntarily paying more interest that you don’t need to pay”.

Lizzy herself frames it as a bet with a high entry cost. “I made a gamble on my future self to actually repay it,” she says, describing her position as privileged and calling early repayment “a luxury. It buys you freedom.”

Below her on the earnings ladder, the numbers tell a different story. Libby, now a project manager at a housing association in Worcester earning £72,000, has seen her balance hover at about £47,000 for years. She is on maternity leave and knows interest will keep accruing while her repayments fall with her income. “It feels like I will never pay it off, so it’s something that I’m kind of just sucking up until the loan is written off,” she says. The debt is written off after 30 years. Her frustration has a comparative edge: her partner did the same course a year earlier, before fees near tripled, and she pays thousands of pounds a year more than he does as a result.

Charlotte, a physiotherapist in Bristol earning about £50,000, is on the wrong side of the interest curve entirely. “Since April this year, I’ve paid off in the region of £450 and I’ve accrued over £500 in interest,” she says. “It makes me angry… it’s just disheartening.”

Meanwhile, the political economy of the scheme is under pressure from more directions than one. Anger intensified after November’s announcement that the repayment threshold, set at £29,385 in England, will be frozen for three years from 2027, meaning graduates start paying sooner and pay more each month. The Rethink Repayment campaign, founded by Oliver Gardner and followed by all three friends, wants a lower interest rate, a lower repayment rate and a reversal of the freeze. Gardner says the government is “engaging much more openly and honestly” but that “the onus is very much on them in the upcoming October budget to take this by the reins”, warning graduates will not accept “minor tinkering around the edges”.

The Department for Education says it is “taking decisive action to improve the student finance system”, pointing to increased maximum maintenance loans, the return of targeted maintenance grants, and having “raised the repayment threshold for Plan 2 loans for the first time since 2021”. It adds that it will keep looking for ways to make the system fairer for students, graduates and taxpayers “in a financially sustainable way”.

The information gap at the point of sale has also drawn scrutiny. A BBC investigation in March found the DfE had compared monthly repayments to £30-a-month phone contracts in school presentations in England a decade ago, and an inquiry by MPs concluded this amounted to “mis-selling” because it was inaccurate for higher earners. Last month the government said applicants in England would receive clearer information before taking out loans.

Lizzy notes that her twin sister, who started university in 2011 under the older terms, carries less debt. “Whether you went to uni in 2012 or 2011 actually financially has a huge impact, and it shouldn’t,” she says. All three say they would still go to university again, though Charlotte adds she might choose a different course and career path. The balances, meanwhile, keep accruing, and the question now is whether the October Budget offers this cohort relief or leaves the interest to run.