By Ruby Sharkie, Associate News Editor
In a recent Prime Minister’s Questions, Kemi Badenoch demanded Keir Starmer cut the interest rates on student loans. She said that “The system is now at breaking point for graduates, (…) I believe student loans have become a debt trap”.
This comes as Labour MPs have urged Starmer to reform the repayment system and lower interest rates.
Reports show that the average students are estimated to graduate with over £50,000 in student loans debt, with many watching the number climb drastically via interest, as they make their monthly installments.
When and how much you pay back your student loan depends on when you attended university and what ‘plan’ you are on. There are currently four main types of payment plans for student loans in the UK (not including Postgraduate loans).
- Plan 1: For students from Northern Ireland, or those who started before Sept 2012.
- Plan 2: For English/Welsh students who started between Sept 2012 and Aug 2023.
- Plan 4: For students from Scotland (SAAS).
- Plan 5: For new students in England starting on or after 1 August 2023.
- Postgraduate Plan: Specific to master’s/doctoral loans.
While most students currently studying at Royal Holloway probably fall into the Plan 5 student loan scheme, there are still a minority of students – as well as Alumni and Postgraduates – facing the repercussions of Plan 2 interest rates.
The interest rate (RPI), which is set based on the level of inflation, is currently a topic of debate in Parliament.
The BBC reports: “It [the RPI] is currently 4.3% for anyone who started university in 2023 or later, but for those on Plan 2, who started university between September 2012 and July 2023, the interest is RPI, currently 3.8%, plus up to 3%, depending on earnings.”
The History of the Student Loan
Many years ago, far fewer people went to university, so the government could cover their costs. However, as more students took the higher-education route, the government introduced a mean-tested tuition fee system.
Labour Government – Tony Blair
In the 1990s, maintenance loans were introduced to phase out maintenance grants, letting students borrow money from the government to help with living costs during their studies whilst also expecting graduates to bear the cost of the debt.
In 1998, Tony Blair also introduced tuition fees, capped at £1,000 per year, this was then upped to £3,000 in the year 2006.
Conservative Government – David Cameron
Under David Cameron’s government – in coalition with Liberal Democrats – an overhaul of the university loan system in 2012 meant that tuition loans went up to £9.250 (to replace ‘lost funding’) and Plan 2 student loans were introduced.
Plan 2 student loans were a way for the government to shift the cost of loan debt from the state to graduates. If graduates meet the income threshold of £28,470, they start to pay back their loan debt. These Plan 2 loans mean that graduates pay a combination of ‘above-inflation interest rates’ alongside their fixed payments of 9% of their income. Their debt is automatically written off after 30 years.
Conservative Government – Rishi Sunak
Since then, in 2023 under Rishi Sunak’s government Plan 2 student loan systems were phased out and replaced with Plan 5. Plan 5 student loans mean that graduates start to repay their loans once they earn over £25,000 a year. Interest rates are added from the time they start borrowing (from September 2024, that’s 4.8%), and after 40 years anything they owe is automatically cancelled.
Many have argued that the student loan system is unfair because they were sold a ‘misleading deal’ whilst still being legally a child.
Additionally, students from lower income households tend to end up with more student debt as they may require higher maintenance loans, and may not be able to receive financial support from their families. The household income assessment is the same assessment that has been in place for 18 years – Alex Sobel, (Labour MP for Leeds) it does not represent the “shopping basket” of the modern day.
Tom Allingham from student money website, Save the Student, told the BBC’s Money Box Live: “Over the past 5 years the financial situation that students face has gotten significantly worse. Maintenance loans have fallen well short of inflation.”
Critics argue that lowering interest rates could ease the financial pressure on graduates, particularly those on Plan 2 who face interest rates above inflation. However, the government has previously defended the current system, stating that it allows universities to remain funded while ensuring that those who benefit most from higher education contribute to its cost.
Many graduates are questioning whether the student loan system still represents an investment in education or a long-term financial burden. As calls for reform grow louder in Parliament, the future of the UK’s student loan system may soon face its biggest test yet.
If you are financially struggling, or worried about money, please contact the Royal Holloway Financial and Wellbeing Team: https://www.royalholloway.ac.uk/studying-here/fees-and-funding/financial-support/
Image via Unsplash by Anastassia Anufrieva