Governments got HE teaching on the cheap – and every loan reform proposal starts from there

Now the Institute for Fiscal Studies (IFS) has modelled the proposals – showing who’d gain, who’d lose, and what it’d all cost.

Plan 2 loans were issued to 11 cohorts of English undergraduates – those who started courses between 2012/13 and 2022/23.

As regular readers will know, the terms of these loans have been tinkered with repeatedly, most recently at autumn budget 2025 when the chancellor froze the repayment threshold for three years from April 2027.

Before I get into the proposals, it’s worth noting a number the IFS buries in the data. For the 2022/23 cohort, total loan outlay was around £22 billion. Estimated lifetime repayments under current policy? Around £23 billion in today’s prices.

In other words, Plan 2 is roughly self-financing for this cohort in aggregate – graduates are expected to repay slightly more than was lent out in real terms.

IFS’ education spending report, published in January, estimates that under current policy the taxpayer will bear just 3 per cent of the total cost of financing higher education for this cohort – down from 9 per cent before the budget freezes.

The heavy lifting is being done entirely within the graduate population, through a mechanism most borrowers don’t fully understand – above-inflation interest charged to higher earners is effectively cross-subsidising the write-offs for lower earners.

That lack of subsidy in a system that was supposed to share the costs reframes every one of the reform proposals below – because while some of them might look “expensive”, that’s partly because right now, the government has been getting teaching on the dirt cheap.

The Tory pitch

First up, the Conservatives. Their proposal is to reduce the maximum interest rate on Plan 2 loans to RPI (Retail Price Index) – matching the rate already applied to the newer Plan 5 loans available to students who started from 2023/24. This sounds straightforward and fair. Who could object to removing above-inflation interest?

The catch is in the distribution. IFS estimates that this reform would reduce average lifetime repayments for the 2022/23 cohort by around £11,000 in today’s prices. But graduates in the lowest fifth of lifetime earnings would see “almost no change in their lifetime repayments.” The 30 per cent with the highest lifetime earnings, on the other hand, could expect to save upwards of £20,000.

The reason is mechanical. For lower-earning graduates who’ll never clear their loans before the 30-year write-off, reducing the interest rate just reduces the amount that eventually gets written off – it doesn’t change what they actually pay month to month or over their lifetimes. The monthly repayment is 9 per cent of earnings above the threshold regardless, and a lower interest rate only helps you if you’re on track to fully repay – which means, by definition, the higher earners.

Now recall that self-financing point. Under current policy, above-inflation interest from higher earners is what makes the system nearly cost-neutral for taxpayers. The IFS estimates the long-run exchequer cost at around £4 billion for the 2022/23 cohort, spread over roughly 30 years. That’s a cross-subsidy to the richest grads being transferred from graduates to taxpayers.

The IFS estimates this reform could increase the proportion of graduates who repay their loans in full from around half to around two-thirds.

And crucially, the benefits “would materialise gradually” – very few would see any immediate difference, with “almost no typical students (who started university around age 18) seeing any reduction in their repayments during their 20s.” The highest-earning third would start to see savings of around £200 a year from about age 32, peaking in their mid-40s.

So when the Conservatives talk about fairness on student loans, they mean it’d be fair to charge graduates less interest on debt that, for many of them, functions more like a tax than a loan anyway. For the lowest earners, this proposal is essentially cosmetic – a balance sheet adjustment that changes the number on a statement but not the money leaving their pay packet.

What Badenoch has latched on to correctly is the psychological impact of seeing a growing balance on the student loans statement. What Martin Lewis was going on Good Morning Britain was the spreadsheet. In a way they’re both right.

Threshold politics

The Liberal Democrats have gone in a different direction entirely – proposing that the repayment threshold should increase each year in line with average earnings growth rather than being frozen and then rising with RPI. This would return the indexation rule to what it was before the Johnson government’s 2022 reforms.

The immediate effect is that everyone making repayments would pay less, and they’d feel it in their payslip. By 2029/30, the threshold would reach around £31,710 instead of £29,385 under current policy, meaning all those earning above that higher figure would repay around £210 per year – or £17 a month – less. Not a revolution, but tangible and immediate.

Interestingly, the distributional picture is almost the mirror image of the Conservative proposal. The IFS finds that the largest lifetime savings would go to graduates in the third and fourth deciles of lifetime earnings – around £14,000 each. The lowest-earning third could repay around £10,000 less on average, compared with around £1,000 less under the Conservative proposal.

Meanwhile, the very highest earners “may repay slightly more in total” because they’d repay more slowly and accrue more interest before clearing their loans – though they could (and very probably would) avoid this by making voluntary early repayments.

Average lifetime repayment savings? Around £8,000 – broadly comparable to the Conservatives’ £11,000, despite the totally different distributional shape. The long-run exchequer cost for the 2022/23 cohort is around £3 billion.

Similar long-run costs, then, but the choice between them really does come down to a political question – do you think the main problem with Plan 2 loans is that higher earners pay back too much interest, or that everyone’s monthly repayments are too high?

Just reverse it

There’s a proposal not in the new IFS report which plenty of Labour MPs and NUS is calling for – what if the government simply reversed the threshold freeze it announced at autumn budget 2025?

Before November 2025, both the repayment and interest rate thresholds were set to increase each year in line with RPI. That was government policy. The chancellor changed it, freezing both sets of thresholds for three years from April 2027.

IFS’ annual education spending report tells us the combined effect of the budget freezes increased average lifetime repayments from the 2022/23 cohort by around £3,200 – from £52,600 to £55,800 in today’s prices. Those in the third decile of lifetime earnings got the worst of it, repaying around £5,000 more on average.

Before the freezes, the taxpayer was set to bear around 9 per cent of the total cost of financing higher education for this cohort. After them, that figure fell to 3 per cent. The budget freezes shifted around £1.3 billion in long-run costs from the taxpayer to graduates in a single cohort – and similar amounts from each of the ten earlier cohorts.

Reversing that – just the freeze, nothing else – would cost the exchequer a one-off capital spending hit of roughly £5.6 billion, the mirror image of the one-off £5.6 billion capital spending reduction the freeze generated in 2026–27.

That £5.6 billion figure is worth remembering, because it’s the real price tag of political inaction on Plan 2 reform. Every other proposal being discussed starts from a baseline that already includes the chancellor’s raid on graduate repayments.

The political trap is obvious. The chancellor froze the thresholds specifically because it generated a one-off fiscal windfall. That windfall has been booked – it’s part of how the fiscal rules are being met. Reversing it doesn’t just cost money in the abstract – it hands back headroom the chancellor has already spent. Add in the politics of “yet another u-turn”, and you have a relatively unlikely option.

Go big or go home

The campaign group Rethink Repayment seems to have proposed all of the above and more – a higher threshold of £31,200 indexed to average earnings, interest at CPI (Consumer Price Index) rather than RPI plus 3 per cent, and a reduction in the repayment rate from 9 per cent to 5 per cent. The effect? Monthly repayments “approximately halved” for most graduates, and expected lifetime repayments from the 2022/23 cohort cut by around £28,000 on average.

The long-run cost? Around £12 billion for the 2022/23 cohort alone – three to four times the Conservative or Lib Dem proposals. And that’s just one cohort. The IFS notes that the “fair value” of the entire Plan 2 loan book was £129 billion at the end of March 2025, and a package that halved future repayments “might expect the fair value of the student loan book to be reduced by something in the region of £60–70 billion.”

Whether those are big scary numbers or big justified numbers depends, again, on what you think the point of the system is.

The cost-neutral card trick

The most interesting section of the report – at least for anyone who cares about political viability – looks at a near cost-neutral option.

This would involve reducing the repayment rate from 9 per cent to 5 per cent while extending the write-off period from 30 to 39 years. This is similar to what Labour MP Luke Charters has been floating.

The effect would be to reprofile payments – lower monthly repayments in graduates’ 20s and 30s, but the highest-earning third might see their annual repayments increase from around age 42. Low and middle earners would benefit from lower payments right up until the end of the original 30-year period, after which both middle and high earners could expect to pay around £2,000 more per year through their early 50s.

The total cost to the exchequer? Around £0.3 billion for the 2022/23 cohort – essentially cost-neutral. But while it wouldn’t change the overall split between taxpayers and graduates, it would redistribute among graduates – lower earners paying less, higher earners paying more.

The distinction matters. This option doesn’t disrupt the self-financing nature of the system in the way the Conservative or Rethink Repayment proposals would. It keeps the total bill roughly where it is but reshuffles who among graduates pays it. The IFS is clear that this “would not change the way total costs were shared between taxpayers and affected graduates” – it would just change the distribution within the graduate population.

In effect, it would replace the current cross-subsidy mechanism – above-inflation interest from higher earners funding write-offs for lower earners – with a different one, where higher earners pay for longer to fund lower monthly repayments for everyone.

Charters has suggested offering graduates a choice between existing terms and the new terms. The IFS notes drily that “we might expect those who anticipate having high earnings in their 50s and 60s to prefer to stick with their current terms” – which would, of course, increase the exchequer cost.

It would also add complexity to a loan system – or rather a set of systems – which are already complicated for many graduates (and prospective students) to understand.

And the real killer is that it wouldn’t really fix that “oh my god look at the state of my loan balance” issue that seems to have been the kernel of the issue to start with.

Why nothing moves

Which brings us to the bit the report handles carefully but which deserves saying bluntly – the reason Plan 2 reform keeps not happening isn’t that the 30-year costs are unaffordable. It’s that the immediate hits to borrowing would blow through the fiscal rules in the year they’re enacted.

The way student loans show up in the public finances is complex – the accounting treatment can make genuinely bad policy look fiscally attractive and genuinely sensible reform look ruinous.

Take the Conservative proposal. A reduction in the interest rate “unambiguously weakens the government’s long-term fiscal position.” But because it reduces the portion of student loans the government expects to write off, the original capital spending recognised when loans were issued turns out to have been too high, and a huge correction would be needed.

The Lib Dem proposal would trigger a one-off capital transfer from government to borrowers of “somewhere in the region of £10 billion in total.”

Remember that the chancellor pocketed a one-off £5.6 billion capital spending reduction by freezing the thresholds at autumn budget 2025. The Lib Dem proposal – which reverses those freezes and switches to average earnings indexation – would cost roughly double that as a single-year hit. The chancellor manufactured headroom by freezing thresholds. Undoing that means handing the headroom back.

And the Rethink Repayment package? The one-off capital spending increase “could easily be in the tens of billions,” plus a longer-running reduction in current receipts each year for the next three decades.

The IFS makes the point twice – in two separate sections – that policy decisions about the appropriate level and structure of repayments for graduates “ought not to be based on the specific accounting treatment a given reform would receive.”

But the accounting treatment is almost certainly why the chancellor will be hesitant to change things. It doesn’t matter that the 30-year costs of the Lib Dem or Conservative proposals are broadly manageable. What matters is that fiscal hits would be politically radioactive in a year when the chancellor is already scrambling for headroom.

What’s missing

What the IFS can’t tell you – because it’s modelling existing borrowers, not systemic reform – is what any of this means for the underlying funding of universities and students.

Every pound less that graduates repay is a pound more the taxpayer picks up, and this government hasn’t shown enormous enthusiasm for increasing the teaching grant.

The report also doesn’t address the maintenance side – where the maximum student loan is now less than average student rent, because that’s a separate funding stream, even if it all feels like one mess to the students living it.

The other thing that’s becoming increasingly clear is that whatever tweaks the government makes to the system may not quell the anger at paying for HE later in general – something that’s been learned by the centre left in both Australia and the USA.

With a large intergenerational wealth transfer coming, it’s starting to look much fairer in the next decade (and less politically ruinous) to ask the wealthy to pay more upfront. Which over 10 per cent apparently do now anyway.