No Budget help for graduates drowning in student loan debt

There are no current plans to overhaul the student loan system in the Budget to cut graduates’ cost of living, The i Paper understands. Two senior government sources have told this newspaper that the cost of reforming the controversial student loan repayment system is too high. They said it was unlikely that Chancellor John Healey would announce changes to either the repayment threshold or the interest rate on Plan 2 loans when he delivers his Budget statement on 28 October. Shorts Instead, the Government is likely to announce a broader review of student finance at the next general election. One source said: “I would eat my hat if anything was in the Budget on this.” Another added: “Anything in this space costs an absolute fortune and there is no money.” Budget measures remain under consideration, however, and final decisions have not yet been taken. Interest is charged on Plan 2 loans at the rate of Retail Prices Index (RPI) inflation, plus up to 3 per cent depending on how much a graduate earns – although the rate was capped at 6 per cent for the 2026/27 academic year in April. Repayments begin when graduates earn £29,385. In July, Lucy Powell, the new Education Secretary, described the current interest charge as “egregious” and said the issue was “very much at the top of my in-tray”. This autumn, she is expected to set out the Government’s response to the House of Commons Treasury Select Committee’s recommendation that ministers reverse the freeze on the Plan 2 student loan repayment threshold. The cross-party committee of MPs said earlier this year that ministers had a “moral obligation” to act at the next Budget. Plan 2 loans cover students who began undergraduate courses in England between 2012 and 2023. The repayment threshold is due to be frozen in cash terms from 2027 to 2030, meaning more graduates will repay a larger share of their earnings as wages rise. The soaring cost of student loans has become a touchstone political issue for thousands of graduates on the controversial repayment plan, with some in England and Wales paying tens of thousands of pounds more than they originally borrowed. But those hoping for Andy Burnham’s new Government to reverse the freeze and cut interest rates may find themselves disappointed. Reversing the freeze alone would cost the Treasury billions of pounds over the coming years, with one estimate putting the cost as high as £10bn. Separately, the Institute for Fiscal Studies estimated that reducing Plan 2 student loan interest rates to RPI only would cost £4bn if applied to the 2022-23 entry cohort alone. Healey is likely to face difficult trade-offs at the Budget as he seeks to fund the new Prime Minister’s priorities, including increased defence spending, without resorting to large tax rises. Soaring government borrowing costs have already eroded much of the financial buffer left by Rachel Reeves, his predecessor. The Treasury has been asking investors how they would react to a smaller fiscal cushion for meeting the Government’s fiscal rules. Officials are canvassing opinion after the conflict in the Middle East halved the £24bn of headroom left by Reeves. Officials have been told that avoiding policies that stoke inflation and demonstrating a clear commitment to reducing borrowing matter more than the size of the headroom left to balance the books. The Treasury has also been examining higher taxes on banks, property and gambling companies to help repair the public finances, which have been hammered by the conflict in the Middle East and concerns over debt and runaway inflation. However, Burnham has signalled that he would like to avoid steep tax rises in the Budget, following two record tax-raising Budgets imposed by Reeves. “We have had two budgets in 2024 and 2025, and we have to be conscious of the extent to which we have raised revenue,” Burnham said in New York last week. “We have to make sure we get the balance right.”