Recently, the terms of Plan 2 student
loans – which were issued to English students who started
university between 2012 and 2022 – have been back in the news. In
this briefing, we describe how these loans work and how much
recent graduates with these loans might expect to repay each
month, and over their lifetimes.
Many low-earning graduates will not
fully repay their loans, with any outstanding balances
being written off 30 years after they
graduated. This is an intentional feature of these
loans and is a consequence of the fact that repayments
depend on how much graduates earn – with graduates not
making repayments if they earn below a given repayment threshold
(currently £28,470) – and not
on their outstanding balances.
Many high-earning graduates can expect
to repay their loans in full, and to repay much more than
they borrowed in real-terms as a result
of the interest added. The interest rate on
these loans varies between RPI and RPI plus 3%,
and also depends on a graduate's
income.
Some of the terms of these
loans – such as the repayment rate (9%)
and the use of RPI to set the interest rate
– have not changed since they were
issued. However, the repayment threshold and the interest
rate thresholds (the income levels at which different interest
rates apply) have been subject to constant tinkering by
successive governments, including at the Budget in
November. These changes will affect how
much graduates will repay each month from April 2027, and
the total amount they can expect to repay over their
lifetimes.
Kate Ogden, author of the
briefing, said:
“Several million graduates have
outstanding Plan 2 student loans, which were issued to English
students who started university courses between 2012 and 2022
(and are still issued to Welsh students). These are not like
normal loans. The amount graduates repay each month depends on
their income, with anything unpaid after 30 years wiped with no
consequences for graduates. This means many lower earners will
never repay more as a result of the interest added to their
loans; their loan repayments may be best thought of as a
tax.
The repayment terms of Plan 2 loans
have changed over time. We estimate that those who started
courses in 2022 can expect to repay around £16,000 more on
average than if there hadn't been any changes to the loan terms
since they applied to university. Around £3,000 of this comes
from the freezes announced by the Chancellor at the Budget last
November.”
ENDS
Notes to Editor
How do Plan 2 student loans work,
and how have they changed over time? is an IFS
briefing by Kate Ogden.
You can read the briefing here on the IFS
website
