Understanding the Plan 2 loan repayment system
Treasury makes over £600 million surplus from 2022/23 Plan 2 student loans as NUS and HEPI publish an alternative student loan model.
Key findings
- Changes to the Plan 2 terms mean that the Treasury will make a surplus of ca. £679 million for the 2022/23 cohort of students (which is the final cohort of English students on Plan 2).
- The changes mean that by 2032, graduates from the 2022/23 cohort earning £40,000 or more a year will be expected to repay £740 more in that year than under the original Plan 2 terms that were in place less than a year before these students started their studies.
- As a result of the combined changes to the Plan 2 system, male graduates will pay on average an extra £13,400 over their lifetimes compared to the original terms, and female graduates will pay an extra £16,900.
- In response, NUS and HEPI are publishing an alternative model of a cost-neutral student loan system, where the net Exchequer cost of the system is close to zero, and repayments will be more manageable for graduates.
New research by London Economics has found that following various changes to student loan terms, implemented since early 2022, the Treasury are making a surplus of £679 million for the 2022/23 cohort of undergraduate student entrants in England. The research also found that the Government’s changes have had a greater adverse impact on lower- and middle-income earners, while higher earners have been much less affected.
Young people heading to university take out student loans to cover their tuition fees as well as their living expenses through a maintenance loan. For Plan 2 students (from 2012/13 to 2022/23 in England), interest starts to accumulate while they are at University, at RPI+ 3%. They pay back 9% of their earnings over a certain threshold, which the Chancellor has recently frozen until April 2030. The freezing of this threshold will reduce the Treasury cost of student loans by £1.3 billion for the 2022/23 cohort alone. The National Union of Students have likened the Chancellor freezing the thresholds to the behaviour of a loan shark.
In response to these new findings, the National Union of Students and the Higher Education Policy Institute are today publishing an alternative model for student loans, which would be cost-neutral for the Treasury, i.e. the Exchequer cost of funding the cohort is close to zero.
The proposal looks at a stepped repayment system. Based on the current Plan 2 system, instead of the flat 9% repayment rate above the repayment threshold (for 30 years), they propose a marginal repayment rate of:
- 3% on earnings between £12,570 (the PAYE tax-free threshold) and £27,570;
- 5% between £27,571 and £42,570;
- 7% between £42,571 and £57,570; and
- reverting back down to 3% above £57,571.
Income-contingent real interest rates would start at £12,570, increasing to the maximum of 3% at £42,570 (i.e. the total interest rate would be 3% + RPI at that earnings level). The repayment period stays at 30 years (as under the current Plan 2 terms). These changes would make the student loan repayment system somewhat more progressive than Plan 2, and a lot more progressive than the Plan 5 loans, which have been in place since 2023/24. The stepped repayment system also addresses affordability issues faced by graduates by lowering the marginal loan repayment rate to between 3% and 7%.
Public pressure forced a Treasury Committee inquiry into student loans, which has been running for the past month and closes on Tuesday 14th April 2026.
Amira Campbell, National Union of Students President said:
Successive Governments have made a calculated choice – to profit off young people who were told university was the best option. Unfairness is baked into the current student loan system, where the poorer you are, the higher debt burden you face, but quite simply the Government should not be profiting from our debt.
These past few months, we’ve seen a reckoning that young people will not stand by while politicians play with our debt and change the terms of a loan we signed before we could vote. This Labour Government now face a choice, whether to keep meddling with a broken system or choose to back the young people who are trying to build their futures.
We hope this Government, who once spoke of free tuition, will at least try to do the right thing and bring about fundamental reform of this broken student loan system. For too long, students and graduates have been at the receiving end of political decisions that harm them. This is now a question of trust. Can we trust our government to make decisions in our best interest? Or will they break that trust and keep profiting from our debt?
Rose Stephenson, Director of Policy and Strategy at the Higher Education Policy Institute said:
This report highlights a fundamental truth at the heart of the student finance system: there is no perfect solution, only a set of trade-offs. The cost of higher education is ultimately shared between taxpayers and graduates, with the added complication of how repayments should be distributed across graduates who earn different amounts. Getting this balance right is both difficult and essential - particularly in a time of constrained economic growth.
The reality is that today’s graduates are being asked to shoulder more than those who came before them. That raises questions about intergenerational fairness and is contributing to a growing psychological burden as debt levels climb ever higher.
The balance of who funds higher education is a political choice. If the government decides to tilt the balance, it should do so openly, set out the terms clearly to prospective students at the point they take out their loans, and then stick to them. Moving the goalposts after the fact, particularly in ways that leave graduates worse off, is not just poor policy; it risks breaking trust in the system altogether.
Dr Gavan Conlon, Partner at London Economics said:
Much of the recent press has centred on the recent announcement of the three-year freeze on loan repayment thresholds. However, this is not the main source of concern. In reality, the changes that were made in 2022 following the Augar Review are much more consequential than the recent ones. These changes account for approximately £4.6 billion of additional costs for graduates, compared to £1.3 billion relating to the recent freeze.
The retrospective changes to Plan 2 loans now result in graduates bearing the entire cost of higher education, compared to approximately 40% back when Plan 2 loans were introduced.
Under Plan 5 loans, it is the highest-earning graduates who benefit to the greatest extent. There are alternatives, such as a stepped repayment system, which is somewhat more progressive and could ease the affordability concerns of graduates.
Notes to Editors
London Economics is one of the UK’s leading specialist economics and policy consultancies. With a dedicated division of professional economists specialised in education and labour markets, we have unparalleled experience across the higher education sector. As a result of our independence and the quality of the analysis we undertake, we are considered sector experts and often deliver economic insight to key policy makers and stakeholders. For more information, visit londoneconomics.co.uk.
HEPI was founded in 2002 to influence the higher education debate with evidence. We are UK-wide, independent and non-partisan. HEPI is funded by organisations and higher education institutions that wish to see vibrant policy discussions.
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