Student loan reforms to generate £679million windfall for Treasury

Changes to student loan repayment conditions introduced since 2022 are expected to generate around £679million in additional revenue for the Treasury from the final group of Plan 2 borrowers, according to research by London Economics.

The impact is even greater for newer students. Those who began undergraduate studies in the 2022/23 academic year are forecast to repay more than £5billion extra over time compared with the previous system.

The analysis was commissioned by the National Union of Students and the Higher Education Policy Institute, as concerns grow over how the current loan system treats graduates.

The findings come as the Treasury Committee investigates fairness within the student loan framework, with the deadline for evidence submissions set for April 14.

Criticism of the loans system has intensified this year, particularly after the Chancellor's autumn 2025 budget announcement that the repayment threshold would remain frozen for three years.

NUS president Amira Campbell accused successive administrations of making "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," she said.

Ms Campbell added: "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."

Plan 2 loans apply to undergraduate courses and Postgraduate Certificates of Education taken out from September 2012 in Wales, and between September 2012 and July 2023 in England.

Interest on Plan 2 loans currently stands at a maximum of 6.2 per cent, calculated using RPI inflation plus up to three per cent depending on graduate earnings.

From April 2027, the repayment threshold will be held at £29,385 for three years following the autumn budget changes, resulting in more graduates beginning repayments sooner.

The London Economics report found that those from the 2022/23 intake earning £40,000 or more will pay an additional £740 by 2032 compared with the terms that existed less than a year before they started their courses.

Researchers concluded that the changes have hit lower and middle-income graduates hardest, whilst high earners "have been almost unaffected by the changes".

Dr Gavan Conlon, partner at London Economics, noted that the 2022 alterations account for roughly £4.6 billion of the extra repayment costs, with the recent freeze adding £1.3billion.

The NUS and Hepi have put forward an alternative model based on stepped repayments, which they claim would be largely cost-neutral for Government.

Their proposal would replace the flat nine per cent rate with graduated bands: three per cent on earnings between the tax threshold and £27,570, rising to five per cent and then seven per cent at higher income levels, before dropping back to three per cent above £57,571.

London Economics analysis suggested this approach would create "only relatively small differences" in lifetime repayments whilst improving affordability for lower earners.

A Government spokesperson stated they had inherited the Plan 2 system from the previous administration, adding: "This Government has increased the repayment threshold for Plan 2 loans twice in the past two years the first increases since 2021."

The spokesperson confirmed interest rates on Plan 2 and 3 loans would be capped at six per cent from September.