Student loan system 'fair and reasonable', says Reeves

Chancellor Rachel Reeves has described the student loans system as "fair and reasonable" after criticism over the decision to freeze the repayment threshold for some borrowers.

Earlier in the week, personal finance expert Martin Lewis said freezing the threshold at which graduates repay their loans was "not a moral thing" for her to do as it would be treating the debts like tax.

In her November Budget, Reeves announced the salary at which Plan 2 student loans must be paid back would be frozen at £29,385 for three years starting from April 2027.

Speaking to BBC Newsnight, she argued the government's measures were "fair and proportionate" for getting "the balance right between tax and spending".

She said the changes announced in her Budget were bringing the different repayment plans in line with each other.

"So you'll start paying back at the same income level. I think that is fair and reasonable," the chancellor added.

Money Saving Expert founder Martin Lewis had asked the chancellor to "please have a rethink" of her policy as he went on to say she was treating student loans as a tax - which he stressed they are not.

"It's a contract that the government signed with young people who had not been given any education on these loans," Lewis told Newsnight.

"I do not think it is a moral thing for you to do to be freezing the repayment threshold in this way."

Plan 2 loans apply to students who started courses in England and Wales between September 2012 and July 2023. The threshold is currently £28,470 for this plan.

A freeze would mean workers earning above that amount will be dragged into making larger repayments on their student loans than if the thresholds had risen in line with inflation.

Graduates repay 9% of the amount earned above the threshold outlined in their plan.

They do not have to start making payments until the April after leaving their course and payments are made automatically through the tax system.

But Lewis said there was growing anger, particularly among those in England and Wales with Plan 2 loans, because recent higher inflation has resulted in increased interest rates being applied to the loans.

"When we've had high inflation, their interest rates have gone up and that has been particularly painful," Lewis said.

And even though those rates have come down a little, Lewis pointed out, people who took out student loans during this period will have "a lot more" added on top "which makes it more difficult".

Plan 2 loans are charged a rate of interest equal to Retail Prices Index (RPI) inflation, plus up to 3% on top based on earnings. Someone earning £51,245 or more with a Plan 2 loan will currently be charged 6.2%.

By contrast, those with Plan 1 and Plan 5 loans, who started university before 2012 and since 2023 respectively, are currently charged 3.2%.

While a higher interest rate does not affect the amount someone repays each month, it makes it harder to reduce the size of the loan, meaning the borrower could repay more over time.

'An entire generation have basically been mis-sold their student loan'

Luke Pierre is a finance manager who graduated in 2019. He pays a higher rate of tax and is paying back a Plan 2 student loan.

He told Money Box on BBC Radio 4 that he still owes "well over £50,000" on his loan.

"This is despite paying thousands of pounds to the Student Loan Company over the last six years. And I'm paying RPI plus 3% interest on my student loan, which is an insanely high amount."

Pierre said people going to university aged 17 or 18 are advised "this is a loan you're not going to notice", with low rates of interest that won't affect you getting a mortgage, "but it turns out, it does," he said.

"An entire generation of people that went to uni while these loans were a thing have basically been mis-sold their student loan. It's quite shocking really," he added.

Listening to Pierre, Nick Hillman from the Higher Education Policy Institute said we "shouldn't obsess over student loans".

Hillman argued that a Plan 2 student loan comes with "all sorts of brilliant features," and pointed out they get written off after 30 years if it hasn't been paid down "which simply isn't there with other forms of borrowing".

"These interest rates, which are deeply unpopular, are income related. So you only face the full 6.2% if you're on an income of significantly over £50,000 per year," he added.

He said that people going to university now don't pay this interest rate, but these loans are only written off if they're not paid off after 40 years, not 30, "so they're hit in other ways".

The freeze on student loans came at the same time Reeves announced she would be extending the Conservative-initiated freeze on income tax and National Insurance thresholds for another three years.

When those thresholds are frozen, more income is taxed at higher rates as someone's earnings rise, a process known as fiscal drag.

Plan 2 loans were introduced from 2012, at the same time the Conservative-Liberal Democrat coalition government tripled tuition fees to up to £9,000 a year.