Are student loan repayments out of control?

0:04Since 2012, 5.8 million Brits have taken out Plan 2 student loans in order to go to university. Many are now facing astonishing levels of debt, and the government's latest moves are nudging more graduates into the repayment bracket. So, is it high time the system had a shake-up? Hi, and welcome back to The Standard Podcast. I'm Tamara Kormornick. For all the latest news, head to standard.co.uk. Coming up, a student loan repayment out of control.

0:41In November, Chancellor Rachel Reeves froze the salary threshold for Plan 2 loan repayments for three years, which means more graduates will be pulled into the repayment bracket as wages rise due to inflation. So, is it wise for Labour to ignore the mob of graduates who are getting more disgruntled with their compounding debt each year? In today's episode, I'll be speaking to the Standard Editor of The Londoner's Diary and Features writer, Claudia Cockrell, to try and make sense of the soaring interest rate levels on repayment plans and discuss recent controversies around the student loan system.

1:15I'll also be speaking to Oliver Gardner, the founder of Rethink Repayment, who is calling on the government to reform student loans. First up, it's Claudia. So, Claudia, thanks so much for joining me on The Standard Podcast. Thank you for having me. So, Claudia, there's been a lot of heat on student loans. Can you take us through a whistle-stop tour of the Plan 2 student loan that is getting so much attention at the moment? The Plan 2 student loan was introduced in 2012 when David Cameron's government hiked tuition fees from£3 ,000 a year to£9 ,000. I remember those days very unfondly. And what it is, is you're lent the money by the student loans company.

2:01student loan company pays your fees directly and also gives you a maintenance loan. I think the average student loan for Plan 2 holders is around£45 ,000. And when you start earning over a certain threshold, you start paying it back. It's currently around£28 ,000. You pay back 9 % of your salary a month. It's basically taken off your salary by HMRC. and then you're also charged interest. What happens with plan two is that the amount of interest that you are charged depends on how much you earn. There's a base rate of RPI which is the retail prices index it's currently at 3.2%. Everyone on a plan two loan has RPI added and then up to three percent extra is added depending on your salary.

2:51So if you earn between around 28 and 50 ,000, that 3 % is added on a sliding scale. If you're over the 50 mark, then it's a fixed RPI plus 3%. So that would currently mean you were being charged 6.2 % in interest each month. But because inflation has been really high over the last few years with the cost of living crisis, RPI in 2024, in summer, it peaked at 8%. So that meant that some people who are on higher salaries and also bizarrely, while you're still at university, you get charged that extra 3%, they were being charged 11 % interest. And I mean, for undergraduates, it makes no sense because you have no way to pay back the loan when you're at university.

3:30So by the time I graduated, for example, my loan had already grown£5 ,000 because of the added interest. One of the reasons this story has also gathered steam is because in her November budget, Reeves froze the repayment threshold from 2027 for three years, which means that it's not going to rise in line with inflation and graduates on Lois Alley is going to get dragged back into that bracket. Martin Lewis, the kind of money-saving expert and, you know, de facto chancellor, he's described that as immoral. But Reeves has said she thinks the system is fair, that it's a necessary step to fund the NHS.

4:10And people have really taken issue with her making this direct correlation, especially as young people are generally much less of a burden on the NHS than most people. So it feels like a bit of a kind of facile comparison. What do you think about the case that, you know, students do sign the paper? You know, you could argue that it's up to them to read the terms and conditions. What do you make of that argument? About the small print, you know, when I was like 17, 18, applying for university, it was kind of a given that you got a student loan, you know, I think nine in 10 people who went to university between 2012 and 2023 got a plan to loan.

4:52It was a rite of passage. People used to say, you know, it'll come out of your salary once you start earning money. You won't notice it. And after 30 years, it gets written off. What they didn't say, and what we didn't receive any sort of education on is that the more successful you are, the higher interest rate you're going to get. And that these interest rates are often a lot higher than mortgage rates. That's why people are calling it the stealth tax. And I think there was a Labour MP who's 30 years old, who was saying that this is a mis-selling scandal waiting to happen. Because, you know, you're 17, and I don't think anyone was given the kind of appropriate education on, do you realise what you're getting into?

5:33Because fundamentally, the government wants people to go to university, we're encouraged to go by our schools. So no one really wants to make 17 and 18 year olds wiser to the fact that this is a big financial burden later in life. You're almost having to anticipate your future earnings when you're 16 or 17. When you look at it like that, it just seems kind of crazy because, you know, no one necessarily knows where life's going to go. I mean, having said that as well, what the defenders of the plan to student loan, one of them I spoke to is Nick Hillman. He's the head of the Higher Education Policy Institute, and he was a special advisor in 2010 who helped draw up the student loan system.

6:17And he thinks it's a very fair and explicable structure. And he says that it's got all these wonderful built-in insurance features. For example, if you don't earn above this threshold of£28 ,000, you don't have to pay back the loan. You only start paying it back when you're earning more than that. And also it gets written off after 30 years. So, you know, if you're never successful in work, you'll never have to pay back the loan. But what people who are more successful in their later life feel is why should I be shouldering the burden of this? Why should my success be taxed basically? Which graduates with the Plan 2 loans get stung the hardest by the system?

6:58Yeah, so Nick was saying that he believes the Plan 2 system is progressive because it gets more money back from rich graduates. It's not quite true. The people who are stung the most are these middle to high earners who are earning between 50 and 60 ,000 pounds. And this is because everyone on the Plan 2 system who earns more than that 50 grand upper threshold is charged the RPI plus 3 % extra. So that's whether you're earning 55 grand or 200 grand. This means that people who are earning much higher amounts can pay back the loan quicker. Whereas those people on those kind of middle incomes, their salary is constantly battling against these high interest rates.

7:47And when you were working on this piece, what were some of the ways that have been put forward as possible options to make the system fairer? A lot of the most vocal people who are complaining are Plan 2 holders themselves. So that's now kind of young MPs in Parliament, from Nadia Whittem to Luke Charters, who are both in the Labour Party. Then you've got journalists who are, you know, Gen Zs, younger millennials, who are talking about it. But one of the complaints that Nick Hillman makes is that all these people are kind of poo-pooing the loan and not coming up with solutions. He argues that, you know, why should taxpayers, whether or not they've been to university, have to shoulder the burden for this.

8:33And that is what would happen, he believes, if you change the structure. However, I spoke to Ollie Gardner, who has set up a campaign called Rethink Repayment. And he says that that's a bit of a straw man of an argument, because, you know, you can't go about your life expecting to only pay taxes that benefit you. That's not how tax works. You know, we pay for pensions, we pay for winter fuel payments, we support the NHS when young people don't really lean on it. So one of the other things that people think is quite unfair is that the interest on your loan keeps accruing when, for example, you go on maternity leave.

9:07So a woman who's doing well in her job and is expecting to pay back her loan, when she takes that however many months off for maternity leave, she's going to go back. It's going to go back to, it's like going back to square one, really. Some of the people I spoke to believed that this is almost like a tax on childbirth and that interest should be frozen when you're going on parental leave. Another thing that people want to do is impose like a lifetime cap on repayments. So say, you know, you're never going to have to pay back more than 1.5 times the amount that you were lent. Some of those higher middle earners could end up paying back twice what they were lent, which seems pretty brutal.

9:54So they especially are the ones who want to impose a lifetime cap. Very, very fair point. Well, thank you so much, Claudia, for sitting down with me. Pleasure. Thank you for having me. We'll take a quick break. Coming up, I speak to Oliver Gardner, the founder of Rethink Repayment, who is calling for the government to introduce changes that he says will make the system fairer for all and better for the growth of the country's economy.

10:23Welcome back. Let's head to my chat with Ollie. So Ollie, thanks so much for joining me on The Standard Podcast today. No worries, thanks for having me. So what prompted you to start Rethink Repayment? Good question. I think it was a really bizarre situation where lots of people individually, I think, felt that the student loans were really unfair, but we sort of hadn't come together to voice our concern over it as a generation. more people with these plan to loans. So that's if you went to uni between 2012 and 2023, the first people that got those are now starting to get to the stage of life in their early 30s, where they really want to be doing things like buying houses and starting families.

11:10And I think it's obviously come to a particular like pressure point there for those people. So a lot of graduates are saying that their loan balance keeps rising, even though they're making regular payments, their payments can't keep up with inflation. I just wondered if you had some figures maybe since, say, COVID, has there been a noticeable jump in repayments? Because interest rates on Plan 2 student loans are linked to RPI inflation, and they can go up to RPI plus 3%. That obviously means that when inflation rises, the interest rates on these loans rise. So when we had really high inflation rates in 2021, 2022, that then led to there being really high interest rates on these loans, which meant that lots of people's loans ballooned.

12:01And because of the way compounding of interest works, the interest that's calculated now is obviously already being based on that extra amount of money that's been added. Just as an example, a doctor, a junior doctor, a resident doctor as they're now called and they sent us their student loan statement for last year and they made£1 ,500 in student loan repayments so over£100 a month but£6 ,500 of interest was added to their loan. So their loan balance increased by£5 ,000 last year whilst they were making repayments. So this is what we're saying when graduates feel that it's really unfair because their loan balance is soaring, is that despite making these repayments, lots of people are seeing their loan balance run away from them, which is obviously hugely demoralising because people want to get rid of these debts.

12:56They want to pay them back so it's not hanging over them. But this is made almost impossible by the above inflation interest rates. If anything, it's a perfect case study for financial education of not getting into debt. Yeah, exactly. But the thing is that this was debt that you had to take out if you wanted to go to university. And let's not forget that lots of young people were effectively told that they had to go to university in order to get a quote unquote good job. And therefore, if you didn't have parents that could pay your tuition fees up front, and you wanted to get that good job, you had to take out this loan.

13:39So some people are saying that student loans should be rebranded as graduate tax. Are you in favour of this? And do you think rebranding student loans would make any meaningful difference? No. Short answer. If a graduate tax would have to be for everyone that is a graduate. so why some people call this system a graduate tax is not accurate is because if you were fortunate enough that you didn't have to take out a student loan for whatever reason then you don't have to pay this graduate tax so if it is a graduate tax or people want to think of it like that it's a really bad one and it's also a bad one because if you're in a really high earning job and you can pay your loan back quickly, you then avoid a lot of the interest that middle earners have to have basically paying back for most of their working lives.

14:38So this idea that it is a pure graduate tax isn't true. And I think just rebranding the current system as a graduate tax is not helpful because it sort of tries to paint over the cracks of what is a really flawed system. And you've said before that you think that the current repayment rate as it stands discourages ambition. Is there any evidence you've seen surrounding this? So we've heard from lots of graduates who are not considering taking promotions or working overtime or in some case they're reducing their hours because of the really high marginal tax rates that they're facing. and so that means that for every extra pound that they earn if you're a higher rate taxpayer you're keeping less than 50p you keep 49p of every extra pound that you earn and that gets particularly gets even more of an issue as you start removing things like child benefits or if you get over the hundred thousand pound mark where you have the withdrawal of the tax-free personal allowance.

15:59And lots of people would obviously say, well, why are we feeling sorry for someone that's earning over£100 ,000? But these are people that we want to sort of attract and retain in our economy, because they do pay a lot of tax. And therefore, if these people are starting to think about moving abroad, or maybe not going for those promotions, in terms of the UK's productivity, I think that's going to have a really detrimental long-term impact. And in terms of doing something about this, your campaign is calling for the reduction of this repayment rate from 9%, as it currently is, to 5%. Why 5 %? Why is this the best intervention?

16:44Who's going to benefit the most? Okay, so there are a few policies that we would actually want to see changed. So the repayment rate is one of them, lowering it from 9 % to 5%. The second one is we think that interest rates on all student loans should be capped at CPI inflation because we don't think that anyone should be paying above inflation interest for what was an educational loan. And thirdly, we think that the plan to threshold needs to be reinstated to what it would have been had it risen as was promised when people were taking out these loans. Why the repayment rate of 5 %? Well, we appreciate that graduates went into this knowing that they would have to contribute to some of the cost of their degree.

17:27We're not arguing for them to be wiped entirely. But 9 % is contributing, obviously, significantly to those high marginal tax rates. The thing that's pushing those higher rate taxpayers into a 51 % marginal tax rate. and we think that lowering the repayment rate to five percent is going to give young people that additional ability to invest in their futures at a time when it's really important because when people are getting into their 30s now that's when they want to be able to save to buy a house or they want to be able to save to start a family or they want to be putting more money in their pension and then not being able to do that is going to have really significant consequences for the UK economy.

18:16We already know that the birth rate is falling and yet if more young people are going to not have children or have smaller families than they would have liked because of these financial pressures that's only going to have more of an impact on the UK later down the line. So particularly at a time when we've got all these other costs of living pressures as everyone obviously knows we think that that's really necessary to help young people sort of make their way in the economy. Well, thank you so much for chatting with me today, Oli. Thanks for having me. Great. And that's The Standard. For all the latest news, head to standard.co.uk.

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