Will student loan rules be Labour’s next U-turn?

A Budget decision to freeze the repayment threshold threatens to provoke a revolt among students, parents and recent graduates, writes John Rentoul

One of the decisions by Rachel Reeves at the Budget in November last year was hardly noticed at the time, but has since provoked a low grumble of dissent among young voters.

Two things threaten to bring the revolt against new rules for student loans to a head. One is that campaigner Martin Lewis has urged people to write to their MPs to protest against the change in the rules.

The other is the by-election in Gorton and Denton in Greater Manchester, where there is a high student population, which will be held on 26 February. The issue of student finance is said to be an important factor in driving young voters from Labour to the Green Party there.

What changes did Rachel Reeves announce?

The chancellor announced that graduates in England with Plan 2 loans will have the starting point for repayments frozen at £29,385 a year for three years from April 2027. This innocuous-sounding change means that people who were at university between 2012 and 2023 will find themselves paying more.

Freezing the starting point in cash terms means that pay rises to keep up with inflation, and promotions, means that more pay will be subject to repayments at 9 per cent, on top of income tax and national insurance.

This is a form of stealth tax, similar in effect to freezing the cash values of income tax thresholds. It will bring in an extra £380m a year for the Exchequer, which is not a vast sum taking the public accounts as a whole, but Reeves described it as “fair and reasonable” in the light of her claim in the Budget that “everyone is being asked to contribute”.

What else are graduates upset about?

There are two reasons that this change, which does not come into effect for another year, has had such an effect. One is the principle of changes to the terms of student loans after the event. One journalist wrote last month: “I believe we were actively misled and missold the loans that have burdened so many of us with a lifetime of effectively lower incomes.”

The other is that the interest rate charged on student loans has changed several times in recent years, especially when inflation was high, because the rate is linked to the Retail Prices Index, with higher rates charged for those on higher incomes.

This means that many graduates have seen their total debt continue to increase rather than decline like a mortgage. For many graduates, this should not matter, because if there is any outstanding debt on Plan 2 loans after 30 years, it is written off. More than half of Plan 2 loans are expected to have some of the debt written off. But those with student debt often feel that the debt is a burden on them, even if they know that they will never have to pay it all.

What comes after Plan 2?

Since 2023, students have been on a new student loan scheme called Plan 5. Its terms are different. The starting point for repayments is lower, at £25,000 a year. The repayment rate is still 9 per cent on top of income tax and national insurance. But the interest rate is pegged to RPI, so it is in effect zero once inflation is taken into account. And the length of the loan is 40 years rather than 30, so many graduates will have to keep paying for another decade before their outstanding debt is written off.

These rules, made by the last Conservative government, were not changed in last year’s Budget, but add to the feeling of many young people that the system is loaded against them.