Student loan changes could cost graduates £250 a year

In the 2025 Budget chancellor Rachel Reeves announced a plan to freeze the threshold at which around four million graduates start paying off their student loan.

How much will these changes cost? The precise impact will depend on each individual and their own earnings, as well as future inflation over the next three years. But our estimates show that graduates could easily find themselves facing an additional £250 a year of payslip deductions by the time the threshold rises again in 2030. 

Over the lifetime of the loan that could amount to almost £10,000 of additional repayments for a graduate whose payslip includes a student loan repayment deduction for the full 30 years, although the impact is hard to predict and could be more or less depending on inflation*. 

Bad news for middle earners

For those on the lowest incomes this change won’t make any difference. If you earn less than the lower income threshold you pay nothing. Although this freeze, which will see the repayment trigger held at £29,385 until 2030, will drag some people into the repayment net when they may otherwise have drifted underneath it. 

For those with higher incomes the changes mean an unwelcome extra deduction from their pay. The changes mean they will repay around an extra £250 a year by the time the freeze ends and they’ll suffer from higher interest rates on the debt as a result of the freeze, meaning those who clear the loan end up paying more in the process.

Graduates earning higher salaries are already clobbered by marginal deductions from salary over 50% - income tax at 40%, NI at 2% and student loan deductions of 9%, meaning they lose £51 from a £100 pay rise. 

To put things pounds and pence figures for recent graduates aspiring to a successful career, median pay in London is on course to exceed £60,000 by 2030 when the student loan repayment freeze ends**. 

A graduate who went to university during the pandemic and took a plan 2 loan, who now works in London and progresses their way up to a £60,000 salary around their 30th birthday will be looking at income tax of around £11,500, National Insurance of £3,200 and student loan deduction of £2,800. Once you factor in a modest 5% personal pension contribution; take home income slips below £40,000 a year. 

The overall impact of forcing graduates to pay more does mean those with higher earnings expecting to clear the balance will be free of the burden sooner and see a reduced lifetime cost of student debt. Although most people in this position will see that as slim comfort, since they have the opportunity to make voluntary repayments to clear the debt sooner on their own terms anyway. 

The worst pain is felt by the rump of graduates in the middle of the income scale. For those that never repay the loan but endure the cost of higher repayments over 30 years, this change is bad news.

Our analysis shows it could cost close to £10,000 in additional repayments in absolute terms over the lifetime of the loan, although the cost is highly uncertain since it depends on future earnings growth, the remaining term until the loan is written off, future inflation and any government policy changes that may or may not be enacted further down the road. 

Clear the debt sooner

There are around four million graduates who went to university between 2012-2022 and hold a plan 2 student loan. The government’s changes move the dial on their student loan repayments and will leave some questioning whether it has tipped the scales in favour of paying off the debt quicker to avoid the higher repayments or the burden of a five-figure debt against their name.

This is not an easy question to grapple with as it depends on your own circumstances, how long you have remaining on the 30-year repayment term, future earnings and inflation. 

The high interest rate on plan 2 loans means there’s a significant incentive to clear the loan quickly. But you want to avoid shooting yourself in the foot by paying more than you would letting the loan run its course until its written off. 

Those who have been in work longer probably have a clearer idea of where their career may take them, giving them a better grasp on when they might wipe the debt through salary deductions. That information makes it easier to weigh up the pros and cons of paying off a student loan early.

As a rough guide, around the £60,000 salary mark graduates with a £50,000 balance on a plan 2 loan start paying back the capital on the loan. Once earnings exceed this level it becomes increasingly likely you’ll repay the debt before it is written off, so there’s a stronger case for freeing yourself of the student loans company quicker if you can. 

Below this salary level you need to weigh up carefully whether clearing the debt is worth it or not. If you’re earning £40,000 and don’t expect your earnings to grow significantly above inflation then you may find the upfront cost of clearing the debt isn’t justified.

The answer will change from person to person depending on how long they have left on their loan, the outstanding balance and their future earnings. 

Paying student fees upfront

Those going to university now will be looking at what’s happened to graduates with a plan 2 loan and wondering whether their own plan 5 loans will take a similar turn. It may prompt some to wonder whether it is better to pay upfront. 

It’s nearly impossible to work out whether you’re better off paying your own way at the start of university or repaying your loan when you graduate, either entirely or in chunks of money, or if it’s better to use that cash for something else. 

It all depends on your starting salary, how much of a pay rise you see over your career, whether you take any career breaks or whether you work part time at any point. It also depends what future governments do with the interest rate you pay on the debt and the threshold for repayments. 

Frustratingly for graduates, they can’t look into the future to see what their earnings will be and whether it’s worth paying upfront. You’ve also got to consider what else you could do with that money. If you had a pot worth £45,000 available to use you could invest it instead. If you got a 5% return a year, after 10 years it would have grown to almost £73,300 and after 15 years it would be worth £93,500.

What about plan 5 loans?

As a reminder, plan 5 loans have a lower starting repayment threshold, at just £25,000 a year, barely topping the full time equivalent of the national minimum wage from next April. 

The maximum term is also much longer – only being written off after 40 years from the point they are eligible for repayment, versus the 30 years for plan 2. But the interest rates both when students are at university and when earning are lower, standing at RPI across the board.

Should parents help children avoid a student loan?

Whether you’re thinking of helping children clear an existing loan or avoid the need to take one out in the first place, there’s a lot to consider. While student loans can be expensive for some, many people will pay back less than they borrow, meaning there no point in clearing the debt. 

First and foremost, don’t put yourself or your family in a precarious financial position. If you’re stretching yourself, or even considering taking out other loans, that’s a big risk. 

If you feel you can afford to fund uni costs for children upfront, or help repay their loan, then the next thing to consider is whether it is worth it financially. 

This requires some guesswork since you’ll need to think about future earnings after graduation. Those who go on to work in high earning professions are likely to repay the cost of their degree and the interest that’s added on top. The latter can be avoided by incurring the cost upfront. But shelling out tens of thousands of pounds now could prove costly in the long run if your children work in a lower earning profession.

Ultimately, many people will decide to hedge their bets with children funding uni through a student loan initially and then keeping some cash in reserve so that they can weigh the benefit of making voluntary overpayments later on.

*AJ Bell calculations based on 3% RPI and no further policy changes to plan 2 student loans
**ONS. Annual full-time gross pay 2025 London median, £49,692. Assumes current 4.7% growth continues to 2030.