Are student loans a debt trap?

It’s not “moral” to keep the student debt repayment threshold where it is, MoneySavingExpert founder Martin Lewis has told Rachel Reeves.

The chancellor has said she’s freezing the salary level at which graduates must start to repay their student loan. This, together with the crippling interest rates charged on the loan, means demoralised young Brits are caught in a “student debt trap” they have “no chance of paying off”, student finance campaigners told Times Higher Education.

What did the commentators say?

“If you wanted to design the most regressive and distortive model for funding higher education imaginable,” you’d get the Plan 2 student loan system inflicted on those “unlucky enough to embark upon a university degree between 2012 and 2023”, said Rachel Cunliffe in The New Statesman.

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In 2012, the coalition government trebled tuition fees to over £9,000, which, even at the time, was “projected to leave the average graduate with close to £50,000 of debt”. And then interest terms on student loans were hiked up to RPI plus 3%, which made “that debt almost impossible to pay off”. A “bizarre additional quirk” meant the interest rate after graduation also varied by salary, so “the more graduates earned, the faster their debt would grow”. “Imagine trying to understand” that “as an 18-year-old”.

Now, graduates who have been making payments for almost a decade are “logging on to the student finance portal” to discover, to their horror, that “far from being paid down, their debt has in fact risen”. A “cohort of productive young people” are discovering they have signed up to “a lifetime of higher taxes”.

In last year’s Budget, Reeves “turned the screw even further”, said Rupert Jones in The Guardian. By freezing the repayment threshold, those young people will have to “pay even more towards their student loans as they benefit from pay rises”.

The “five million or so youngish people” who went to university between 2012 and 2023 “have it rough”, said The Economist. The “student-loans system” is working like “an age-based tax, whipping away 9% of earnings – or 15% for postgrads – above a certain income”. So, to the “acronym soup” of British politics, we must add Avocados: “the Aggrieved Victims Of Crushing Academic Debt Obligations”. Although it is fair and proper that “students should pay for degrees that benefit them”, Avocados are being “squeezed until the stone squeaks”. Their experience will “shape politics for a generation to come. Rotten fruit can make a stink.”

What next?

The threshold salary for Plan 2 loan repayments will remain at £29,385 until April 2027.

The chancellor has insisted that the system is fair. “It's not right that people who don’t go to university” should bear “the cost for others to do so”, she told LBC. If you’re a graduate and earn “a good wage, you’ll pay that money back quicker” and “if you’re never able to repay”, the loan “will eventually be written off”.