The interest on my student loan is more than I’m paying back. Help!

There’s no shortage of shock on social media from disgruntled graduates who can’t believe that they will “never” pay off their student loan.

For most on Plan 2 – mainly English domiciled UGs who enrolled before 2022, and everyone (still) in Wales, it partly reflects a comms issue.

For a large proportion of them – especially those doing more than your standard three year bachelors – the whole idea was that they “never” pay it off.

The write off of the loan at 30 years used to be the subsidy that made the system progressive – but as I’ve often said on here, the worst way to spend subsidy if you want its recipients to be grateful is on one that only kicks in in 30 years or so, and only then if you’re relatively economically unsuccessful in comparison to other graduates.

The perception problem – which makes it less likely that Labour will take steps to make the system more progressive – has been lessened somewhat by the switch in 2022 to Plan 5, which levies interest “only” at RPI rather than Plan 2’s RPI+3%, albeit with a cap (if commercial banks’ average interest rate is lower than what you would be charged based on RPI, a temporary interest rate cap is applied).

The problem is that inflation has been persistently high – and so that “loan balance going up even after making payments” problem has been getting worse.

As it stands, Plan 5 loans have a lower repayment threshold than Plan 2 loans, with the Plan 5 threshold set at £25,000 (up to and including the 2026-27 financial year), compared to £27,295 (up to and including the 2024-25 financial year), with both increasing annually by RPI thereafter.

As of right now, the interest rates are as follows:

For Plan 2, there’s a base RPI of 3.2%. Whilst studying and until the April after leaving the course, that’s RPI (3.2%) + 3% (6.2%). Post-study, there’s variable interest, dependent upon income. That means RPI (3.2%), rising on a sliding scale up to RPI + 3% (6.2%).

• £28,470 or less = 3.2%
• £28,471 to £51,245 = 3.2%, plus up to 3%
• £51,245 or more = 6.2%

The sliding scale works like this. Since 2012, we’ve had a three-band structure – below the lower repayment threshold interest is just inflation (RPI), above the upper threshold it’s inflation plus three percentage points, and between the two the rate “slides” up in proportion to income. The sliding element is expressed as a linear formula, with the +3 per cent increment applied gradually according to how far an individual’s salary sits between the lower and upper thresholds.

To do that, we start with the RPI inflation rate, work out how far income sits between the lower and upper repayment thresholds, turn that position into a proportion (so if you’re exactly halfway, the proportion is one-half), and take that proportion of 3 percentage points – finally adding the result onto RPI.

Confusingly, a borrower’s annual income is assessed over the course of a tax year – from 6 April to 5 April. For borrowers in the UK, HMRC provides this information through PAYE or Self Assessment. For borrowers overseas, the Student Loans Company requires direct evidence of income.

At the end of the tax year, the Student Loans Company uses the recorded annual income to decide where the borrower sits in relation to the lower and upper repayment thresholds. The outcome is then applied prospectively. In practice, the revised interest rates for all borrowers – taking account of both the March RPI and the borrower’s income band – come into effect from the following September. That rate holds for the year ahead until the next round of RPI and income data becomes available.

For Plan 5, things are much simpler. The applicable RPI rate is also 3.2% – during and after study. The repayment rate is also consistent for both Plan 2 and Plan 5 – 9 per cent of everything earned above the current annual salary threshold.

Let’s set aside when (if) borrowers will “ever” repay in full (ie by the time the loan is written off). What we should do is look at how much you have to be earning to get to a point where you’re making a dent in the principal, and actually reducing your balance.

I’ve made up three students here – the figures in Column 1 are notional loan balances on graduation.

That table right there is the killer political problem for the government. Higher interest rates are what make the system more progressive when coupled with a shorter repayment period – richer grads paid more.

Now we have a lower interest rate (albeit set at RPI), grads are still struggling to pay back more than interest every year – so the interest rate cut isn’t actually being felt by those it was aimed at. And because, via the lower repayment threshold, more people are actually paying back, more are “feeling” the injustice.

In Scotland, a good wedge of the notional HMT subsidy is spent on a (much) higher repayment threshold of (this year) £32,745. That comes at a cost, but does mean you get far fewer unhappy graduates watching that loan balance tick up in their twenties when they’re already repaying. Clever.

The government could raise the interest rate again – perhaps not by the full 3 per cent – to notionally raise more money in the future and therefore raise what can be loaned out now. But the politics of interest rates are toxic either way – and it’s pretty much impossible to tweak the system such that it’s a) more progressive eventually, b) feels progressive now, and c) calms down the medics on either plan.