Threshold freeze from April 2027
There is currently a lot of media attention around freezing the Plan 2 student loan threshold for 3 years from April 2027. Couple this with criticism of the level of interest charged on Plan 2 loans, which has resulted in loan balances continuing to increase despite regular loan repayments by graduates. Add to this the lack of transparency around loan terms when 17-year-olds were encouraged to take on student finance, and you can appreciate the current discontent. If you view student loan payments as an education tax, then the proposed freezing of the threshold isn’t too surprising, given how income tax thresholds have been frozen for several years.
Plan 2 student loans
If you attended university between 2012/13 and 2022/23 with student finance, you will have a Plan 2 student loan. An interest rate of RPI (retail price index) plus 3% was charged on the loan while students were at university. After finishing university, interest between 0% and 3% plus RPI is charged on the loans, depending on earnings. Someone earning below the loan repayment threshold is only charged interest at the RPI, while someone earning between the repayment threshold of £28,470 and the current upper threshold of £51,245 (£52,885 from April 2026) is charged interest of between 1.5% and 3% plus RPI. If you earn above the upper threshold, you are charged RPI plus 3% interest. Loan repayments of 9% are made on your salary above the repayment threshold of £28,470 (£29,385 from April 2026) for 30 years or until your loan is paid off, whichever comes first.
Most graduates will make payments for 30 years
Most graduates will repay their Plan 2 loans over 30 years, unless they are high earners. As with so many taxes, middle-earners end up paying the most. As a low earner with a salary below the threshold, you won’t make payments. If you are fortunate to be a higher earner, you’ll probably pay off your loan in around 15 to 20 years. Graduates earning an average to above average wage are looking at 30 years of repayments.
Why are student loans linked to RPI?
Both Plan 2 and Plan 5 student loans are linked to the RPI (retail price index). This is done so that the loan’s purchasing power is maintained, or its value in today’s money stays roughly the same over the life of the loan. This means the loan grows in value each year to match inflation. For example, if you take out a £5,000 loan today and no interest is added, it will be worth less in 10 years due to inflation.
Interest and the longer-term impact
The combined effect of RPI plus 3% interest for Plan 2 loans means most graduates see their loan balances increase despite making payments, especially in the early years of the loan. An interest rate of RPI plus 3% is charged on the loan while students are at university. When graduates start working, interest is charged at RPI plus between 1.5% and 3%, depending on their earnings.
During the early years, the interest charged extends the loan repayment period. Interest charged while at university and low repayments during the early years of graduates’ careers increase the capital balance. When graduates begin working, they are often in lower-paying jobs where they may not be making repayments, and any payments they do make will probably not even cover the monthly interest.
When graduates progress in their careers and earn higher salaries, they may start families, take on mortgages and face higher living costs. Most will invariably find they are paying a significant percentage of their income in student loan payments, when they can often least afford it.
Impact of a frozen student loan threshold
In simple terms, a frozen student loan threshold means graduates pay a higher effective loan repayment over time. This is best explained using an example, so we’ll look at Ash, who has a Plan 2 loan and earns £35,000 a year in 2026. Ash currently makes student loan repayments of 9% on her salary over the current repayment threshold of £28,470. This is 9% of £6,530 a year (£35,000 less £28,470), which is £588 or £49 a month. This is 1.68% of her annual salary. From April 2026, the threshold will be £29,385. Ash receives a pay increase in April 2026, to £36,000, and her student loan payment remains £49 a month.
The student loan threshold will be frozen from April 2027 for three years until April 2030. Assuming Ash receives inflationary increases of 3.2% a year during this period, her monthly loan payments will increase to £59, £68 and £77. This is called fiscal drag when the effective rate of tax, or loan repayment, increases while income remains the same in real terms when adjusted for inflation.
| Date | Salary | Amount at 9% | Annual loan payment | Monthly loan payment | Effective payment % |
|---|---|---|---|---|---|
| Feb 26 | 35,000 | 6,530 | 588 | 49 | 1.68% |
| April 26 | 36,000 | 6,615 | 595 | 49 | 1.68% |
| April 27 | 37,276 | 7,890 | 710 | 59 | 1.91% |
| April 28 | 38,469 | 9,084 | 817 | 68 | 2.13% |
| April 29 | 39,670 | 10,315 | 928 | 77 | 2.34% |
If the threshold had increased annually by 3.2% during this period, the threshold in April 2030 would be £32,297. The annual repayment would be £666, which is an effective rate of 1.68%.
Historical thresholds
This is not the first time the Plan 2 student loan threshold has been frozen. It was frozen at £ 27,295 between 2021 and 2025. Had the threshold increased in line with RPI since 2016/17, it would be around £35,000 in 2026. A great example of fiscal drag in action*. The chart below details the threshold amount since Plan 2 loans came into effect.
| Tax Year | Plan 2 Annual Threshold |
|---|---|
| 2016-2017 | £21,000 |
| 2017-2018 | £21,000 |
| 2018-2019 | £25,000 |
| 2019-2020 | £25,725 |
| 2020-2021 | £26,575 |
| 2021-2025 | £27,295 (frozen for 4 years) |
| 2025-2026 | £28,470 |
| 2026-2027 | £29,385 |
| 2027-2030 | £29,385 (frozen for 3 years) |
Examples of student loan plan 2 repayments
The tables below provide estimates of loan interest, repayments, the time to repay the loan, and amounts written off after 30 years, with amounts discounted back to today’s money equivalent. The chart uses an initial loan of £45,000, with lower salaries than the average amounts below, for the first few years of working. Note that these figures are estimates. They should not be used as a basis for financial decision-making, as there are several variables that can impact the figures.
| Average salary | Interest charge | Repayments | NPV payments |
|---|---|---|---|
| 38,000 | 120,232 | 36,345 | 14,127 |
| 50,000 | 82,472 | 82,417 | 32,035 |
| 100,000 | 33,496 | 78,473 | 52,933 |
| Average salary | Time to pay off | Amount written off | NPV of loan w/off |
|---|---|---|---|
| 38,000 | 30 years | 128,887 | 50,098 |
| 50,000 | 30 years | 50,055 | 19,456 |
| 100,000 | 13.5 years | 0 | 0 |
How do student loans compare with traditional bank loans?
These figures are estimates and purely for illustrative purposes, as obtaining a 30-year unsecured personal loan from a bank at the tender age of 18 with no credit history is probably not a realistic option.
Assuming a personal loan with a 5% interest and annual inflation of 3%, which makes 5% a very competitive interest rate, the estimated figures are:
- Borrow £15,000 a year for the 3 years at university, no payments are made, and interest is charged at 5%.
- For the next 30 years, an annual repayment of £3,230 is payable (£269 a month)
- The total interest paid is £51,898, and the total repayments over the 30 years are £96,898.
- The NPV of the loan payments is £39,920, assuming annual inflation of 3%.
Increasing the interest rate to 6% increases the annual loan payments to £3,677, with a total of £110,322 payable over 30 years (NPV of 45,451).
Comparing these figures to Plan 2 loans highlights the benefit of student loans for lower earners. Furthermore, if you have periods when you don’t work, you don’t have to make any repayments under student finance.
While a reduction in university fees and student loan interest would be great, this is highly unlikely given the current economic conditions in the UK. There is a movement petitioning against the threshold freeze, while campaigning to change the interest to link it to CPI* rather than RPI, and for the total interest charged on the loan not to exceed 20% of the original loan value. *(CPI or consumer price index is lower than RPI, and is deemed a fairer measure).
In conclusion…
If you have a Plan 2 student loan, it is unlikely that any significant changes will happen to the repayments in the foreseeable future. A good outcome will be the government doing a U-turn on freezing the repayment threshold and pledging to increase it by RPI annually. While none of us like having a large loan hanging over us, rephrasing it in your mind as a regular tax payment may help you feel more comfortable and less anxious about the increasing balance.
*NPV – Net present value is used to evaluate investments and compare money across different time periods. NPV calculates what future cash flows are worth in today’s money.
*Fiscal drag happens when tax thresholds and bands are frozen, pushing taxpayers into higher tax bands and a higher effective tax rate.
The links below provide some useful additional resources:
Student loan repayment calculator
Student loan interest and payments
Martin Lewis: Plan 2 student loan? Beware Government freezing repayment threshold
