Monday 18-05-2026 - 09:21

       Written by Rory O'Ceallaigh

       Rory is the 2025/26 LUSU President.

 

 

 

A Quick Recap

Just over a month ago, we told you that the student loans system is unfit for purpose, announcing the Treasury Select Committee’s inquiry into the fairness of the system, and asked you to submit your experience. We also explained that we had submitted our own evidence to the inquiry as Lancaster University Students’ Union, representative of the 16,000 students (thereabouts) studying at Lancaster University. 

Yesterday, the Treasury Select Committee released all the submissions they had received from organisations and representative bodies – your submissions remain confidential, but we can now tell you what we said! 

 

LUSU's Response!

To quickly explain, organisations and representative bodies were asked to answer 14 questions around the themes of interest rates, terms of the loans and Government’s ability to change them, fiscal policy, and fairness – whereas the general survey for students and graduates was a quick poll on your experience.  

And so, time to hunker down with a cup of tea and a biscuit – this is our response in full, checked and approved by your representatives on Union Assembly: 

 

Interest rates 

1) Should a student loan incur interest? 

Student tuition and maintenance loans are not normal consumer credit products and should not be charged interest in the same manner as such products.  

The rate of interest incurred in the current loan model means that graduates must earn over £66,000 per annum to overcome the interest added each year – this means graduates must earn nearly twice the median UK salary to start to see their debt go down; in order for the model to be attractive to prospective students, the possibility of paying it off must at least be attainable.  

An interest-bearing loan also poses a problem for Muslim students, where paying or receiving interest is forbidden under Sharia Law. The current system either forces these students to try to fund their way through university – in the realms of £20,000 a year – break a central pillar of their religion, or simply prevents them from accessing university altogether. The government has made a commitment to an interest free alternative to the current loan system – this is an opportunity to see this to fruition: https://www.gov.uk/government/publications/alternative-student-finance/alternative-student-finance  

 

1b) Should the interest on a student loan be dependent on income?  

The intention of the loans system, in so-far as we understand it, is not to punitively place burdensome ever-growing debt upon those unable to pay for a University education upfront. The same system unduly affects lower earning graduates who take longer to repay their loan. The Committee should consider that average salaries vary widely across the different aspects of the Government’s Industrial Strategy, and that gross income is not an accurate nor ethical measure of the strategic usefulness of graduates’ skills. 

The current model operates on a base rate of interest with an additional variable rate added depending on how much you earn. Despite being designed to prevent higher earners from leaving the system early, this is all too achievable for the highest earners meaning that, ultimately, they accrue less interest than a lower earner stuck paying this debt over their entire working life. A question we raise here would be “is a system designed to try and hold you in debt for longer than you need fair in the first place?” 

If an interest-based model is to be continued, fairness to all graduates must be a priority. Rather than a stepped interest rate, a fairer model would see a flat rate of interest with a stepped repayment rate – this doesn’t fix the problem entirely though, as high earners will still leave the scheme early, and lower earners will still accrue more interest over time.  

The fairest model would be a tax, whether a graduate tax, or folded into already existing income and business taxes, depending how much the government prioritises higher education as a societal benefit. 

 

1c) Should the interest on a student loan be fixed to RPI, CPI, or another measure?  

We would encourage the Treasury Committee to consider how to best future-proof interest rates on student tuition and maintenance loans to ensure they remain reasonable. The Committee should also consider what system best incentivises participation in Higher Education. 

RPI is an outdated measure of inflation, even discounted by the Office for National Statistics, and so would be incredibly difficult to justify as a measure used for student loans without simply admitting it is a profit-making scheme. CPI is therefore a more amenable measure, but must be considered alongside previous comments on whether the loan should incur interest at all. 

 

2) Are interest rates above the rate of inflation on a student loan fair?  

No. Student tuition and maintenance loans are not normal consumer credit products and should not be charged interest in the same manner as such products. Interest rates above the rate of inflation simply punish graduates for seeking to better themselves and prepare themselves for an increasingly competitive job market. Additional interest rates above the standard rate for higher earners could also be felt to be a penalty on ambition – trying to hold higher earners in the scheme for longer perpetuates the view that the student loan system as a whole is a trap. 

If interest is to be charged, it should be capped at a flat rate of CPI. 

 

3) Was it fair for the Government to block the interest rate on student loans from going negative when the measure of index the loan was pegged to went negative?  

No. If the student loan is to be tied to economic measures, the implementation of repayments should be consistent whether interest rates are positive or negative. 

 

4) Should student loans be branded as loans, or as something else? Does calling a student loan a loan exacerbate the dissatisfaction with the product among its users?  

We do not feel a rebrand or renaming will resolve the inherent problems in the current student loans system. If the system were to be radically made more fair, transparent, and understandable to prospective students the terminology of “contributions” could be more appropriate. 

A loan implies a simple model of borrowing money and paying the value back over time, the current model incurs interest at a rate which means the majority of graduate repayments are not even touching the loan they have taken out, instead simply denting the interest accrued. For these students, taking out a student loan is essentially signing a contract into a graduate tax for the remainder of their working lives. 

In 2019, Martin Lewis and the Russell Group proposed a change to the way in-which student loan debt was communicated to debtors. Their example “graduate contributions statement” can be found here.

 

5) What proportion of a student’s university education should be funded by the student versus being subsidised by the state?  

Higher Education is an investment into the future of the country, and the government agrees, setting a target for two thirds of young people to participate in higher education learning by the age of 25 in their recent Post-16 Education and Skills White Paper. To meet this target, it might be appropriate that the proportion of the higher education funded by the state, including universities, would be at least two thirds the cost of delivery and participation – for universities, that is two thirds the cost of running these institutions, and two thirds the cost of maintenance support a student receives.  

However, this target of two thirds of higher education youth engagement is subject to change as political mandates change, and it would be inappropriate and unfair on graduates to continually place the burden of this change on them. Changes to the loan terms is ultimately what has instigated this inquiry in the first case. 

If a cost sharing model is to be followed, the graduate vs taxpayer share should, at the very least, be clearly advertised, making it harder for successive governments to use the model as a way of stealth taxing graduates through subtle changes to the terms of the loan.  

Postgraduate loans are a stark image of a model where a very large share of cost and risk is placed on the individual with little support from the state. This loan amount is inadequate relative to real costs and students are forced to self-finance the gap, often through commercial debt that does not appear on the student loan balance sheet but is a direct consequence of the state product’s inadequacy. Despite this, the government’s own projections suggest the scheme is designed to make a profit for the Treasury.  

A support system which fails to meet realistic costs, drives students into commercial borrowing, and still generates a profit for the government is evidence of under-subsidy, not balanced cost-sharing. This model is a clear demonstration that the cost-sharing balance has moved too far away from state support. 

Ultimately, there is huge national value in university higher education, whether we look at the “necessary” workforce of the future in our engineers, doctors, architects, computer scientists, lawyers, or accountants, or the broader offering of what universities as institutions develop in our society, our historians, politicians, artists, musicians, entrepreneurs – without access to university, we wouldn’t have such national assets as Monty Python, Queen, or David Attenborough. This value must be recognised by the government, and thus university, and access to it, must be fully funded by the state. 

A model to consider looking at when considering state funding of university higher education is that of the apprenticeship levy, whereby there is a transparent and distinct means for businesses which meet a certain threshold to invest in their future workforce, and thus the economy. This is especially pertinent to consider when it is increasingly becoming a requirement to have a degree to enter the workforce; where a company is requiring these higher-level qualifications, they should be expected to reasonably contribute towards the funding model. 

 

Terms of loans and the Government's ability to change them  

6) Should the terms of a student loan be able to be changed by government once the loan has been taken out?  

We are asking for a change to student loans terms through this inquiry, so it would perhaps be unfitting for us to answer this question with a straight no. 

However, changes to the student loans terms that we have seen over the last 15 years have seriously eroded the trust in the system and the Government as a whole. These changes have been seen as deeply unfair, consistently worsening the deal for students and graduates alike. A student entering the student loans system in 2015 did so on an understanding that the repayment threshold would annually increase with average earnings, and thus on the assumption that the proportion of student vs state funding would remain consistent; from 2016 onwards this threshold has been frozen, half unfrozen, and frozen again, and thus a higher burden of student vs state has been placed on students and graduates. There was little to no way for the majority of young people entering into these contracts 10 years ago to know that the changes we are now seeing would happen, even the originators of the scheme are now speaking out against it, and this is where trust has been lost. 

We don’t believe flexibility is a bad thing if it is well managed and well meaning, however a transparent and accountable system must be implemented to instigate any changes to the student loans system. This should be overseen by an independent body so as to curtail any attempts by governments to continue to use the scheme as a political football or an easy cash boost. 

 

7) Does the process around student loans provide enough information, in a clear and fair form, given that this may be the first credit contract for many people?  

No, more work needs to be done to remove much of the complexity from the system as a whole. It is important that the Government do not see student tuition and maintenance loans as the equivalent of a normal consumer credit product.  

When the student loans system was brought in, government information likened loan repayments to a £30-a-month phone contract, and actively avoided referring to matters of debt. This is a huge oversimplification of the system, designed to lure people into it by comparing taking on tens of thousands of pounds of debt at the age of 18 to a relatively minor financial decision of taking out a £30-a-month, easily cancellable, phone contract. When considering a phone contract also, there is the option to shop around for the best deal, while there is only one model of student finance for those who can’t afford to self-finance their studies. This situation is well documented in this BBC article.

As the decision to take out a student loan is most often done when the young person is 17 years old, legally a child, the model must be appropriate to that audience in terms of its simplicity to understand. We cannot expect children to understand the terms of a typical loan contract without guidance, let alone the current model for student loans. 

 

8) Should loans from the Student Loan Company be compliant with FCA rules and principles and the Consumer Duty?  

Yes. If student loans are to be a trustworthy financial product, they should be regulated as such. Even as a non-typical consumer product, there must be regulation to ensure consumer trust. 

 

9) Does changing the terms of a government loan contract once it has been entered into erode trust in Government?  

Yes, obviously.  

Young people and graduates are repeatedly, across successive governments, the subject of changes to the student loan system for political or financial advances. This not only erodes trust in the government who has made each change, but it actively creates distrust in any and all governments that are and will lead this country.  

Voter intentions of the current demographic of young people forced to take out student loans with little trust that they are a good investment will never look favourably upon the incumbent government who are perpetuating the system. We must also acknowledge that these young people with distrust in government, over time, will become the working majority of the country and the leading body in our economy – building distrust now will only arise as a problem later. 

 

10) Might changing the terms of a loan once it has been taken out affect future take up of student finance through lack of certainty in the loan product?  

There are currently no alternative finance products, and students cannot afford to attend university without a loan, this paired with the job market demanding a degree, the further education model pushing young people into university higher education, and government higher education targets, means it is unlikely to have a real impact on future take up of student loans.  

This does not mean the current model of student loans is fit or fair however, it instead highlights further issues with regards to optionality and the current education and employment pipeline. 

 

11) Are there examples of government unilaterally changing the terms and conditions of finance provided to companies or pensioners or other groups in the economy?  

There are no directly comparable examples we could find where the government has unilaterally changed the terms and conditions of finance in the same way they have with student loans. 

The case of the “WASPI” women saw a change in terms around the eligibility for a finance product, the state pension, whereas what we have seen repeatedly with student loans is the change of the product itself. Students have entered into one agreement with set terms of debt and interest accumulation, and over time these terms have been changed to increase the cost burden on them in ways they could never have reasonably anticipated.  

Despite differences, it is notable that the WASPI case is high profile due to the campaign against government changing the terms of a pre-agreed finance product. Changes like this are not popular, and widely agreed to be unfair. 

 

12) Should the incomes of higher-earning graduates be used to subsidise the loans of lower-earning graduates?  

We would like to see a progressive system, where high earners pay more into the system to support those who earn less. As a loan and a consumer product, this is unfeasible.  

As a “contribution”, there may be scope to tailor that contribution based upon the financial benefit received by graduates. I.e. higher earning graduates may be able to contribute a larger amount than their lower earning peers. This would be dependent on a system that is not, at its core, an individualised consumer product rather than an investment in a public good. 

A progressive system is perhaps most feasible as a tax, whether a graduate tax or part of the general tax systems already in place shared by all society rather than just individual graduates. 

 

Fiscal policy  

13) How does the student loan system interact with the taxation system, including marginal rates?  

Graduates experience repayments as part of their effective tax burden regardless of what legal label is used. A Plan 2 graduate on a salary of £35,000 faces a combined marginal deduction rate of around 41 per cent – this sort of marginal tax rate is intended, in the current system, for higher earners, not those below the median UK income. At £55,000, that rises to around 51 per cent. In the personal allowance withdrawal band above £100,000, the effective rate can exceed 60 per cent. These rates have all been creeping up as successive freezes to repayment thresholds have been made. 

Consider postgraduate loan (plan 3) repayments also, which stack on top of the undergraduate loan, which would see a graduate on £40,000 facing combined loan deductions of around £2,490 a year, on top of income tax and national insurance. 

This issue is most felt when graduates reach their higher earning potential in their 30s and 40s. The higher effective taxes they are being charged due to student loan repayments hinder pension savings, the ability to buy a house or sustain a family, and simple financial stability enjoyed by generations before them at that time of life. A recent study by Barclays highlighted that “44 per cent of those with student loans say the debt makes it harder to be financially stable, with 41 per cent saying their repayments make it harder to save for a home”, and “savers with student loans put away £2k less per year towards a house deposit than those without”.

Any changes made to the student loan system must factor in the effective tax burden it places on graduates, and the socioeconomic effect this has. Freezing the repayment threshold may make the treasury some more money in the short term, but when that comes with the expense of stalling the economy later down the road one must consider whether it is the right decision. 

 

Fairness  

14) Do student loans currently deliver equitable shares of burdens and benefits between generations?  

No. In part, the loan system is the victim of the generous systems of the past where tuition was free and maintenance costs were covered by grants. It is also worth noting that students were historically eligible for Job Seekers Allowance during holiday periods.  

The Government has shifted extremely quickly from a system of full state contribution to near-full student contribution towards Higher Education. In the space of 28 years tuitions fees have risen from £0 to over £10,000 per annum. In the same period, vocational Higher Education programmes within the NHS have moved from paid apprenticeships to full student loans. A sense of inter-generational injustice is inevitable.  

Exacerbated by recent cost-of-living pressures, skyrocketing rent costs, and an inadequate maintenance loan system impacting how students are able to spend their time, as well as rising costs of delivery paired with frozen tuition fees impacting the quality, scope, and scale of what universities are able to offer, we must also consider that the student experience is very different to what it was 15 years ago. What the student loan is paying for, whether that is the tuition fee loan or the maintenance loan, is markedly different, and these differences will inevitably be compared between generations.  

With the current maintenance loan model, students now are living, by the government’s own definition, in poverty while they study, forced to earn while they learn leaving very little time or funds to do anything else, all alongside the growing pressure to get a good degree in order to compete in the hypercompetitive graduate job market. This, of course, perpetuates the student mental crisis we are seeing, and raises the question “is it actually worth it?” – this is not the image of student experience sold in the pitch to 17-year-olds to take out a student loan, and compounds the feeling of distrust and dissatisfaction in the current model. 

The Treasury Committee, whilst carefully considering the future of student tuition and maintenance costs, must also consider how the situation for Plan 2, 3 & 5 graduates can be elevated in a fair and balanced manner.