How do Plan 2 student loans work, and how have they changed over time?

What are Plan 2 student loans and how do they work?

Plan 2 student loans were issued to English undergraduate students who started courses between 2012/13 (when fees first increased to £9,000 a year) and 2022/23.1 Students were able to borrow to cover their tuition fees, and also for their living costs while at university.

The repayment terms are as follows:

• From the April after they graduate, borrowers make loan repayments of 9% of their income above a repayment threshold, which is currently £28,470.
• Interest is typically added to an individual’s balance at the rate of inflation measured by the Retail Prices Index plus 3% (‘RPI+3%’) while studying, and then at a rate between RPI inflation and RPI+3% depending on their income each year. Interest is added at the rate of RPI for those with income up to £28,470, at RPI+3% for those with income above £51,245, and at a variable rate in between.
• Any outstanding loan balance is written off after 30 years with no adverse consequences for graduates.

This system protects graduates from the worst problems associated with student loans in many other countries. Countries that have mortgage-style student loans (which must be repaid over a given period regardless of graduates’ earnings) typically have high rates of default, with serious consequences for borrowers’ access to credit in the future. In the English system, graduates are protected from having to make unaffordable repayments and do not face the risk of defaulting on their student loans if they do not earn enough to repay them.

How much do borrowers repay each year?

How much an individual repays towards their student loan depends only on their income. If they earn less than £28,470 in a year, they will not make any loan repayments. They make repayments at 9% of any income above this threshold.

One measure of loan affordability is the average repayment rate or ‘repayment burden’ – repayments expressed as a share of earnings in a given year. As shown on Figure 1, someone with a Plan 2 loan earning £35,000 a year can expect to make repayments of £49 a month, equivalent to 1.7% of their gross earnings. This rises to £161 a month (3.9%) for someone earning £50,000 and £311 a month (5.3%) for someone earning £70,000. While these repayment burdens are lower than in many countries that offer mortgage-style student loans, they may still make an appreciable difference to graduates’ living standards and ability to, for instance, afford mortgage repayments.

From the perspective of a borrower with an outstanding student loan balance, this structure means repayments function similarly to an additional tax. A basic-rate employee earning over £28,470 can expect to keep 59p of every additional £1 they earn after income tax, employee National Insurance contributions and student loan repayments – compared with 68p if they were not making student loan repayments. A higher-rate taxpayer would keep 49p of every additional £1, compared with 58p if they were not making student loan repayments.

Unlike a tax, borrowers can choose to make overpayments, paying down their loan balance more quickly. For someone who will eventually pay off their loan in full, this will mean lower total lifetime repayments (because there will be less interest charged). However, it also means giving up some of the insurance value of student loans: for an individual whose earnings turn out lower than they expected, overpayments early in life can mean they pay back more of their loan than they otherwise would have done.

How much can borrowers expect to repay in total?

We estimate that, on average, those who started university in 2022 can expect to repay around £56,000 over their lifetimes (in today’s prices). This compares with average up-front borrowing of around £48,000 in today’s prices for the same group.

As shown in Figure 2, we estimate those in the lowest 10% of lifetime earnings will pay back around £9,500, because they will rarely earn above the repayment threshold. The highest-earning half of graduates can expect to repay around £74,000 and to pay back much more than they borrowed in real terms because of interest accrued on their loans.

What changes were made at the Budget?

At the 2025 Autumn Budget, the government announced that the repayment threshold for Plan 2 loans will be frozen at its April 2026 level (£29,385) for three years, instead of increasing with inflation. It is set to increase each year in line with RPI from April 2030.

This three-year freeze will see any borrower with an outstanding Plan 2 loan earning above £30,416 repaying an extra £93 in 2027–28. In the 2029–30 tax year, affected borrowers can expect to repay £259 more (or £22 a month).

The interest rate thresholds – which determine how much interest is added to loans – will also be frozen for three years. This change was not mentioned explicitly in the Budget documents published by HM Treasury. The freeze in the interest rate thresholds will increase the interest rate applying to loans for those earning between the two thresholds.

These two freezes will have very different impacts across the income distribution.

Lower-earning graduates can expect to repay more over their lifetimes mostly due to the freeze in the repayment threshold (green bars on Figure 3). The freeze in the interest rate thresholds (yellow bars) will not increase their repayments, but will instead add to the amount of unpaid interest that will eventually be written off in relation to their loans. 

Higher-earning graduates will make larger repayments earlier in life as a result of the repayment threshold freeze, meaning that they will pay off their loans more quickly. If this were the only change, they may repay less overall, as they would accrue less interest before having fully repaid. However, the interest rate thresholds freeze means they can expect to accrue (and repay) additional interest.

Together, we estimate that the latest freezes will increase average lifetime student loan repayments from the 2022 university entry cohort by around £3,000 (in today’s prices). Borrowers in the third decile of lifetime earnings can expect the largest lifetime loss as a result of the combined freezes, repaying around £5,000 more on average in total over the next 30 years.

The impacts on repayments from ten earlier cohorts of students – all those who started courses between academic years 2012/13 and 2021/22 – are likely to be similar or slightly smaller. 

Given the way student loans are reflected in the public finances, the main fiscal impact of this policy measure at the Budget was a one-off reduction of £5.6 billion in capital spending in 2026–27, reflecting an increase in the value of the stock of existing loans.

Were Plan 2 student loans ‘mis-sold’?

One common complaint from borrowers is that their loan repayments are much higher than they anticipated when they took out the loans.

Many of the terms of these loans – particularly the repayment rate of 9% and the interest rate of between RPI and RPI+3% – have not changed over time. They were features of the loans which were set out when borrowers took out the loans (although that does not mean they were communicated or explained well to 18-year-olds making complex financial decisions).

However, the repayment and interest rate thresholds have changed. The repayment threshold was initially set at £21,000 and was meant to increase with average earnings each year from 2017. Instead, it has been subject to repeated freezes (although it was also increased substantially by Theresa May’s government in 2018, from £21,000 to £25,000). The most significant change came in early 2022, when the Conservative government under Boris Johnson froze the threshold at £27,295 for three years and changed the default indexation from average earnings to RPI.

Constant tinkering with the thresholds makes it difficult to compare the loan terms borrowers now face with those they might have expected when they took out their loans – each cohort of students might reasonably have had different expectations of how their loans would work.

But for those who started courses in 2022, we can compare their current loan terms with stated government policy when they applied to university: for the repayment threshold to increase with average earnings from 2022. If this had happened, we estimate they could expect to repay around £40,000 on average (in today’s prices) – compared with £56,000 now (£16,000 more). As shown on Figure 4, graduates across the distribution of lifetime earnings can expect to repay more under current policy (yellow) than had the terms not changed since the start of 2022 (blue). Lifetime losses for middle-earning graduates as a result of changes since they applied to university now amount to around £22,000. 

These estimates assume that after the three-year freeze announced at the Budget expires, the Plan 2 repayment and interest rate thresholds will again increase with RPI each year. If instead the thresholds remain frozen (as has been the case with income tax thresholds since April 2021), this would further increase lifetime repayments, particularly from lower-earning graduates. 

It is clear that many graduates will repay more than they would have expected to at the point of taking out the loan. This does not necessarily imply that the loans were mis-sold. As highlighted above, student loans have many features in common with taxes: in particular, the amount repaid each month reflects a borrower’s income, rather than the amount borrowed or the interest rate. Tax policy is changed frequently and does not lead to accusations of mis-selling. One difference is that student loan borrowers are required to agree to terms and conditions when they apply for student finance. However, these terms did mention that the terms of the loans may change as ‘the regulations may change from time to time’. Whether the changes are seen as akin to changes in tax policy or as unexpected changes to the terms of a loan, there is debate about how well the system was communicated to prospective students.

Why do many borrowers see their loan balance increase each year?

Many borrowers will see their outstanding loan balance increasing year on year in cash terms, despite them making monthly loan repayments. This will depend on their income – which determines how much they repay and the interest rate they face – and their outstanding loan balance.

The dark line on Figure 5 shows the points at which a borrower’s loan repayments would match the interest added in a year, leaving their loan balance unchanged. Those in the purple areas can expect to see their loan balances increase in cash terms year on year; those in the green areas can expect to see their loan balance decrease as they will repay more than the interest that is added. For instance, someone with an outstanding loan of £50,000 would need to earn around £63,000 (and repay £3,100 per year, or £260 each month) to see their loan balance stay the same – and would need to earn more than this to see it start to come down.

That some borrowers will see their outstanding balance increase year on year is part of the design of these loans. It reflects the fact that the amount borrowers repay depends on their income, rather than on their outstanding balance. Unlike with a mortgage-style loan, there is no requirement for the loans ever to be fully repaid.

Many graduates may never repay the principal on their loans. They may see their loan balances increase year on year for the next 30 years – but any interest added will increase the amount that is wiped after 30 years, rather than meaning they ever repay any more. For these individuals, their student loans operate more like a tax. It is the repayment rate and repayment threshold which determine how much these graduates will repay overall, rather than the interest rate.

In contrast, for higher-earning graduates, Plan 2 loans operate much less like a tax and more like a standard loan. This is because the interest added will affect repayments for higher-earning graduates, who can expect to eventually repay the accrued interest (meaning that higher interest rates will see them making repayments for longer). For these individuals, the repayment rate and repayment threshold determine how quickly they will repay their loans, but the interest rate is the key thing determining how much they will repay in total. Making higher repayments early on may reduce the amount they are required to repay in future years – something that would not generally be true in the case of a tax. 

How are the new Plan 5 loans different?

Major reforms announced in February 2022 mean the system looks quite different for those who started university from 2023 onwards, who instead have ‘Plan 5’ student loans.2

For these cohorts, the repayment threshold will be lower, at £25,000, and is set to be frozen in cash terms until 2027 – and then to increase with RPI. The repayment period will be longer, at 40 years, up from 30 years. And the maximum student loan interest rate will be lower too: interest will be charged at the rate of RPI inflation, instead of a maximum of RPI inflation plus 3%.

Those who started courses in 2022 can expect to repay substantially more – around £8,700 more on average – than if they had been subject to the same Plan 5 loan terms as similar students who started their courses a year later. Those in the top half of graduate earners, who would particularly benefit from the lower interest rate applied to the new loans, can now expect to repay on average around £20,100 (more than a third) more in today’s prices than if they had Plan 5 loans. As shown on Figure 6, the old Plan 2 loans (yellow) are still more favourable for the lowest-earning graduates, who will repay less as a result of the higher repayment threshold and the shorter repayment period, although the latest freezes have narrowed this margin substantially.

The lower interest rate on Plan 5 loans means that, under current policy, graduates with these loans would not be expected to repay more than they borrowed in real terms, even if they go on to become high earners. This will not have been true for many students with Plan 2 loans. However, that graduates can expect to repay less on average under the Plan 5 system means that, in the long run, Plan 5 loans will be costlier for the taxpayer.