Good afternoon from New Economy Brief.
After months of defending the embattled student loans system – even calling it "fair and reasonable" – Rachel Reeves finally acknowledged at last week's Mais Lecture that there are issues. But if desperate grads, a core voting bloc for Labour, were hoping this signalled a U-turn, they were quickly disabused: the problem isn't "front of the queue" for the Chancellor.
As Labour backbench MPs (many now student loan recipients themselves) ramp up pressure on the Chancellor and the Treasury Committee launches an inquiry, the economic impacts of the current approach are also in question. This week, we ask: is fixing the student loan system fundamental not just to fairness for a whole generation, but to economic growth and aspiration more broadly?
A Brief History of Student Loans
The good old days. Until the 90s, higher education in England was effectively free; the state paid fees and offered living cost grants. In 1998 fees were introduced at £1,000 under Plan 1, rising up to £3,000 in 2006. Interest was charged at RPI or Bank Rate +1% (whichever is lower), repayments were income-based, and loans would be written off after 25 years.
A broken system. The current furore is mainly around Plan 2 loans, introduced in 2012. The tuition fee cap rose to £9,000, interest was set at RPI + up to 3%, and the write-off period became 30 years. In 2016, the Conservatives abolished means-tested grants for living costs, ensuring students from low-income families took on the most debt, before raising fees further to £9,250 in 2017. Plan 5 loans, introduced in 2023, re-pegged interest to RPI, but this cohort faces a 40-year wait for write-off. Postgraduate borrowers pay even more – 6% on top of any undergraduate loans.
Eye-watering debt. Roughly £21bn is loaned annually to 1.5 million students. Student loans are now worth £267bn, forecast to reach £500bn by the late 2040s. The average English student leaves with £53,000 of debt, the highest in the OECD, including the US. Meanwhile, Scottish students finish with just £17,000 in government loans, those in Northern Ireland £28,000, and Wales £39,000.
Why Does it Matter?
Graduate gripes. Graduates have many reasons to be unhappy. First, interest rates. RPI, an outdated measure, runs consistently higher than CPI. Plan 2 borrowers pay a further 3% on top, meaning 2.7 million graduates accumulated more interest than they repaid in 2024-25. Second, repayment at 9% of all earnings above the threshold means graduates on salaries over £30,000 face a marginal tax rate of 37%. Those earning £50k or more with a postgraduate loan face 57%.
Finally there’s simple fairness: graduates and campaigners have accused the government of mis-selling loans by changing terms after they were taken out. The scheme is also regressive, with many of the richest opting out or paying off loans early, while lower-earning graduates will pay more over their loan lifetime. Meanwhile the graduate pay premium is shrinking as the cost of living skyrockets.
Universities hollowed out. Frozen fees have cut universities’ income from domestic students by a third in real terms since 2016. Meanwhile, government grants have collapsed from 30% of university income in the late 90s to under 5% in 2018. 40% of universities now run a deficit, up from 21% in 2020-21, while academia becomes an increasingly insecure and underpaid career path. International student income, which historically plugged the gap, is waning as the government’s immigration policy pushes students away. These are existential challenges for a sector that is structurally important for the UK economy, both in its own right and to underpin competitiveness in other high-skilled, knowledge-based sectors.
Students stretched thin. Students rely on maintenance loans that now cover on average just half their actual living costs; 68% now work while studying, versus under 50% three years ago.
Labour market effects. This doesn’t only damage individual graduates. It also undermines young people’s ability to afford housing, suppresses their consumption and harms both saving and eventual retirement. There may also be unintended consequences for the labour market – some tax experts suggest that very high marginal tax rates discourage graduates from taking promotions because so much of the pay rise goes straight to loan repayments.
Fiscal framework says no? Freezing the threshold gave the Chancellor a bit more so-called headroom within her fiscal rules because of how national accounting rules treat student loans. Any change to improve the system for graduates is likely to butt up against those self-imposed rules – and Reeves has repeatedly said breaking them is off the table. And as the Institute for Fiscal Studies notes, the relationship between the public finances and student loans “is complex and can be counter-intuitive” because of the interactions between interest rates, levels of repayment and the overall value of the student loan book. This all creates uncertainty about how changes would show up in the National Accounts. As a result, the IFS has warned against making the accounting treatment of student loans the basis of policy decisions about how they are structured and repaid.
What Next?
Tweaks to the system. Several campaigns have sprung up recently, and public opinion is on their side with 76% of Britons now worrying students are too indebted. Rethink Repayment wants to cut the repayment rate to 5% and cap interest at CPI. However, the IFS reckons these relatively modest changes could cost tens of billions to deliver just for Plan 2 borrowers. Meanwhile, the Good Growth Foundation, reportedly working with Labour MPs, would raise the threshold to £33k and cut repayment rates, imposing a 40-year term to pay for it. IPPR modelled a stepped approach, starting at 4.5% and rising to 9% above £50k, to protect lower-income graduates.
A graduate tax? MillionPlus, the member body for post-1992 universities, previously proposed a fully stepped graduate tax peaking at 3.5% above £42k, making the current system less regressive. However, NIESR raised several concerns with graduate taxes, including overseas enforcement, ringfencing of funding and potential unpopularity.
Britain's Most Trusted Man™. Martin Lewis has thrown his weight behind reversing the threshold freeze. He criticised Conservative leader Kemi Badenoch, suggesting that changing repayment thresholds would be fairer than her idea of capping Plan 2 interest at RPI, mostly benefitting higher earners.
I agree with Nick. The Lib Dems have plans to unfreeze thresholds, restore maintenance grants and write off loans for workers like nurses, doctors and teachers after 10 years of public service. One especially eyebrow-raising intervention came from former Lib Dem leader and infamous tuition fee promise-breaker Nick Clegg, who declared student loans “a mess”.
Goodbye to fees? Zack Polanski, speaking at the New Economics Foundation last week, said he would scrap fees entirely and write off existing debt, but conceded work is still needed on how to fund it, saying he'll look to think tanks to work out the details. Reform, meanwhile, would end interest on loans, but extend repayment to 45 years.
As Rachel Reeves says, the Government has no firm plans aside from reintroducing limited maintenance grants which would support students from low-income households studying specific subjects. With rising political pressure both from partisan rivals and within Labour reflecting the real-world harms the current mode inflicts, this issue isn’t going anywhere. Can the government get ahead of the public mood on this, or does it have the makings of another damaging U-turn?
Who profits from an oil shock? Isabella Weber and Gregor Semieniuk map out the beneficiaries of the 2022 oil and gas windfall, warning that the pattern is repeating with the Iran war. Her analysis of over 250,000 shareholders found that in the US, the wealthiest 1% captured 50% of fossil fuel profits, while the bottom 50% got just 1%. She calls for a permanent excess profits tax on oil and gas, with revenues used to protect households and finance the clean energy transition.
Don't raise rates – cap prices. Josh Ryan-Collins from UCL IIPP argues that the Bank of England should continue cutting interest rates in the face of the Iran war oil shock. He argues that rate hikes did little to address inflation between 2021-23, which was driven by firm pricing power rather than wage-price spirals. The BoE should instead support the government to introduce price caps on essential services or public ownership of energy.
Crude Awakening. A new Common Wealth report argues the root cause of energy price volatility is the system linking electricity prices to gas, meaning even as renewable energy grows, bills still depend on fossil fuel markets. The report calls for fundamental reform to decouple the cost of electricity from gas prices, protecting households from future oil shocks and accelerating the transition to green energy.
Raising standards, not rents. Generation Rent has published research exploring experiences of fuel poverty and energy inefficiency for renters ahead of the government's planned policy on Minimum Energy Efficiency Standards. The report calls for more powers to hold landlords to account for failing to meet these, as well as better support for low-income renters.
Rent Freezes. As the Iran war drives up energy costs and living pressures mount, the Spanish government has announced its intention to freeze rents for two years, alongside other measures such as more support for households in energy poverty.
Furniture Poverty. End Furniture Poverty has published new research on the extent of furniture poverty in 2026, finding that five million UK adults lack essential items like beds, cookers or washing machines – particularly those in private rentals and leaving temporary accommodation. The report calls for a national furniture poverty strategy and more local authority funding for furniture reuse schemes.
'Doge of the left'? New Green-aligned think tank Verdant has published its first report, advocating for a ‘Doge of the left’. Arguing that “the political right have monopolised the discussion about savings in government”, Verdant’s co-chair, James Meadway, says a ‘Doge of the left’ would “rinse out the tax avoiders, the profiteers and the fraudsters”, with savings directed into delivering high quality public services – echoing the approach taken by New York Mayor Zohran Mamdani.
