A generation hung out to dry: The cost of taking out a loan to study at university has steadily risen to eye-watering levels. But, as LUCY EVANS reveals, one group of graduates is being charged far more than others

When I finally plucked up courage to check the balance on my student loan last week, I was horrified.

I have a good graduate job, have seen the repayments snaffled from my income every month and was hopeful I’d at least chipped away a little.

Nonetheless, I had put off checking it since I graduated, as I knew the figure would be substantial and I preferred to live in blissful ignorance.

But I was gobsmacked to find my balance has actually grown to hit £81,737. I may have paid in £863 since I graduated and started working two-and-a-half years ago, but over that time I have accrued another £2,687 in debt.

It’s a losing battle. I may have to accept that I will have an ever-growing debt around my neck until I reach the age of 50, at which point it’ll finally be wiped off.

For years, millions of students like me simply accepted that getting into vast sums of debt was our only option if we wanted to go to university.

We were told not to worry about it – to treat it as a graduate tax and to appreciate that the debt was a small price to pay for the additional earnings our degrees would afford us.

But for a growing number of graduates these arguments don’t wash any more. It’s not just the fact that a degree doesn’t guarantee you a good career in the current difficult jobs market, or that outstanding balances on the scale of mine are not unusual.

It’s that the interest rates for around 5.8million students like me who started university between September 2012 and July 2023 in England (as well as all students in Wales since then) are now bordering on usury.

And – perhaps the straw that will break the camel’s back – the Chancellor Rachel Reeves has announced a change to the repayment rules that will mean this same cohort will have to start repaying their loans even sooner.

Here’s what has gone wrong – and how the latest change could prove yet another hammer blow to our finances and aspirations.

How does the loan system work?

It’s hard for graduates like me to imagine, but until the late 1990s you didn’t have to pay to go to university. On the contrary, you’d get a grant rather than be charged fees.

Once the fees were introduced, however, anyone who couldn’t afford to pay their fees up front had little choice but to take out a student loan.

The terms of these loans have been tweaked and toughened up by successive governments – and of course alongside that, fees have risen.

However, it is my group, graduates who started university between September 2012 and July 2023 – and anyone since then in Wales – and are on the Plan 2 repayment scheme who have got the rawest deal.

Most are also subject to the latest government change that will make paying off the debt even more painful for some, as I’ll explain.

Those who studied before and after us are charged 3.2 per cent interest, which is the Retail Price Index (RPI) figure for inflation from March last year. That includes those on Plan 1 (who started a course before September 1, 2012), Plan 4 (those who applied to the Student Awards Agency Scotland) and Plan 5 (English students starting a course on or after August 1, 2023).

They all pay no more than RPI under the terms of the loan (although Plan 1 and 5 have lower thresholds than we do to start making repayments).

But my lot on Plan 2 are charged interest based on RPI plus an extra amount depending on our earnings.

If you earn less than £28,470 in a year, you make no loan repayments. Repayments are a punitive 9 per cent of any income above this threshold.

Those earning between £28,470 and £51,245 will accrue interest at a rate of 3.2 per cent plus as much as 3 per cent depending on their earnings. Anyone earning more than £51,245 will see their loans balloon at an interest rate of 6.2 per cent this year.

We’re the only ones with undergraduate loans charged at more than RPI.

So what are the latest changes?

Now there’s another sting in the tail for those on Plan 2.

In last November’s Autumn Budget, the Treasury revealed it would freeze the threshold at which English graduates on the Plan 2 scheme must start making student loan repayments.

The threshold is to be increased from its current £28,470 to £29,385 in April – and then frozen until 2030. The policy is set to rake in an extra £400million a year for the Treasury.

If you are likely to pay back your loan in full, you’d think the freeze would work in your favour as it will mean you start paying it back earlier and so are likely to finish paying it sooner. However, because the interest thresholds are also frozen, even higher earners are likely to accrue and repay more interest.

But if, like many, you are never going to manage to pay it off, having to pay earlier will only increase the total that you pay.

Lower earners who are already having to balance a careful budget will face having to pay their loan back earlier than if the threshold had risen in line with inflation.

Those already over the threshold who get a pay rise will have to repay 9 per cent of a bigger chunk of their earnings.

The freeze has sparked outrage among borrowers, many of whom have shared their eye-watering debt balances in social media posts.

Oliver Gardner, founder of campaign group Rethink Repayment, says young people are angry at what they feel is a change to the terms of their loan.

He says: ‘They feel that the terms keep changing and the Government keeps moving the goalposts. The freezing of the threshold means people are paying more back each month and that’s not how the terms of the loan were set out.

‘For lots of people, their loan balance is soaring and getting bigger each year, even if they are making consistent repayments. It is really demoralising and unfair.’

When criticised over the frozen thresholds, the Chancellor dug her heels in and claimed that the changes to the threshold were ‘fair and reasonable’.

What difference will it make?

You could say, what’s the big deal? Surely freezing the threshold at £29,385 for three years can’t make much difference.

But take, for example, a 22-year-old graduate on Plan 2 who earns £28,000. If the threshold for repayment was not frozen, and instead rose in line with the average RPI rate of inflation over the past 12 months, then they wouldn’t have to start making repayments and would have more disposable income.

But since the threshold will be frozen, the young worker will be dragged over the threshold by any inflation-linked pay rise and have to start making repayments from April next year.

The amount they pay would increase with every pay rise that they got until 2030. Say they got a pay rise of 3 per cent every year, the freeze would have cost them an extra £330 by 2030. That may not look like much, but that graduate is at a life stage where it could make a considerable difference to their pension or even their ability to buy a home.

If the graduate funnelled the £330 into a pension instead of having it taken in loan repayments, they would have a pot worth £13,864 by the age of 60, thanks to the power of compound interest and assuming their investments grew by 7 per cent a year. With matched employer contributions and tax relief – an effective £820 saving – they will have a £47,713 nest egg waiting for them when they retire, according to calculations by Alice Haine of investment group Bestinvest.

If the frozen threshold was the only burden faced by those on Plan 2, maybe it wouldn’t feel like such an outrage.

But it’s on top of interest rates that are now in some cases close to double the rate of inflation. Plus, the inflation rate used to determine the rate on all student loans is RPI. It tends to be higher than the more commonly used and more modern CPI rate of inflation. Were CPI used, payments would be lower. For example, CPI is currently 3.4 per cent, while RPI is running at 4.2 per cent.

And it’s not the first time the repayment threshold has been frozen. It was frozen at £27,295 for three years in early 2022 and linked to RPI rather than average earnings as it was previously.

Impact on first-time property buyers

Student loan repayments affect how much a first-time buyer is able to borrow, as lenders scrutinise disposable income when they decide how much someone can feasibly repay each month.

David Hollingworth, of broker London and Country, explains: ‘Student debt is like any other loan commitment because there is money outgoing. It’s not the size of the outstanding debt that matters to lenders, it’s the fact that you have regular amounts outgoing.

‘Banks will take into account your income but also factor in commitments. Once you’re making repayments, it will reduce the amount you can borrow.’

He adds: ‘If you have to make repayments sooner because of the threshold freeze this will impact you more quickly.’

In reality, the freeze just makes it harder to build up a deposit and get on the housing ladder.

Those on Plan 2 arguably already have it hard enough. For example, take a couple, both earning £50,000 a year with £1,200 in child in childcare costs every month. They are able to borrow around £456,000 from a mortgage lender, according to calculations by broker London and Country. However, if that couple must make student loan repayments every month, they are only be able to borrow £414,000 – some £42,000 less.

Student debt: the hardest lesson of all

As the system currently stands, a Plan 2 basic-rate taxpayer graduate earning over the threshold can expect to keep just 59p for every extra £1 they earn above the threshold, after tax, national insurance and student loan repayments have been deducted.

That’s compared to 68p if they had no student loan repayments, the Institute for Fiscal Studies says. Higher-rate taxpayer graduates keep just 39p for every £1 they earn.

To the critics who say we knew what we were signing up for – and there are plenty of them – I reply that I was 17 when I completed my student finance application.

My father, an accountant, even talked me through the process and what it would mean for me. But the real-life implications on my pay-packet, mortgage and pension – which seemed so far away – were lost on me at the time.

What can you do to cut the cost?

Is there anything graduates can do to stop their student loan ballooning? For many graduates, the answer is ‘very little’.

The only way you could potentially reduce the term of your loan and the amount you repay is to make overpayments.

But deciding if it makes financial sense is not straightforward, says Laura Suter of AJ Bell.

As debts are wiped after 30 years for Plan 2 graduates, they need to weigh up whether they should simply let their debt ‘run out’ or if it is financially worthwhile for them to overpay.

High earners who expect to pay off their debts before the 30 years can save on the amount of interest they will owe by making early repayments.

For many, it is difficult to forecast likely future earnings to see how the numbers weigh up. But for those on well-worn career paths such as medicine, making a judgement call may be easier.

Ms Suter says: ‘Frustratingly, graduates can’t look into the future to see what their earnings will be and whether it’s worth repaying the debt early.

‘If graduates or parents have spare money they could make overpayments, but it’s fiendishly complicated to work out if this is going to save you money over the term of your loan or if you’re just throwing money away.’

For example, take a graduate on the Plan 2 scheme with £40,000 of student debt on a salary of £35,000 that grows by 3 per cent every year.

If they made additional payments of £200 every month towards their loan, they would stand a chance of clearing the debt in under 30 years and therefore reducing the total interest paid. However, if they paid back any less than this, they would still have an outstanding balance after 30 years. Since your total balance is wiped after 30 years there is no advantage to having a smaller balance outstanding so unless you’re going to pay back the full amount in under 30 years, there is no point in overpaying.

That’s according to the Student Loan Calculator UK (studentloancalculator.uk), which says if you are unlikely to clear the balance before it is wiped off, overpayments typically just increase the total you pay.

Graduates must also consider what else they could do with their funds. If you receive a lump sum of £45,000 from an inheritance, for example, you could invest it instead of making overpayments, Ms Suter explains.

After ten years, it would have grown to £73,300 at a return of 5 per cent a year.

Some are pushing for the system itself to be reformed.

The National Union of Students has even launched a petition to reverse the freeze on loans among other requests such as reforming interest rates. On Friday it had more than 6,832 signatories. And now I’ve checked my student loan balance, that number will rise to 6,833.

My generation has been hung out to dry.