Four ways Plan 2 student loans could change - what it means for you

A new report from the Institute for Fiscal Studies (IFS) looks at several ideas for changing Plan 2 student loans. These are the loans taken out by students who started university in England between 2012 and 2022.  

Plan 2 student loans have been under scrutiny recently, partially due to the decision to freeze income thresholds after which borrowers need to start repaying. Thresholds will freeze in April 2027 for three years, meaning higher earners and those getting salary bumps over the next few years will ultimately pay more.  

The policies discussed in the IFS are not confirmed. They’re ideas from political parties and campaign groups. But the IFS has crunched the numbers to show how each option could affect graduates’ monthly payments, how much they repay in total, and the cost to taxpayers. 

Here’s what you need to know. 

How Plan 2 loans work today 

If you want to find out how student loans work, check out our article on figuring out what the different student loan plans mean for you. But, in a nutshell, here’s how Plan 2 works:  

• You repay 9% of what you earn above £28,470 a year. 

• Interest is added at RPI inflation + up to 3%, depending on your income. 

• Any unpaid balance is wiped after 30 years. 

The report found that students who started university in 2022/2023, and who are in the lowest 10% earners among graduates over their lifetime, will only repay around £9,500 in total. In contrast, the highest-earning half of graduates will pay back around £74,000 in total, which is far more than they borrowed in real terms due to the impact of interest on their loans.  

The IFS report looked at four broad ideas to reform Plan 2 student loans, including cutting interest, raising the repayment threshold, a bigger overhaul with lower payments, and lower monthly payments but a longer repayment period. Here's what each would mean for graduates.

1. Cut interest to inflation only

Scrap the extra 3% interest and charge interest at just RPI. 

What it means for graduates 

• Monthly repayments wouldn’t change for most people, because these depend on your salary, not your loan balance. 

• But high and middle earners would repay less overall because their debt would grow more slowly. 

Who benefits most 

• High earners: could save £20,000+ over their lifetime. 

• Middle earners: will also save a lot, on average, lifetime loan repayments will be lowered by £11,000.  

• Low earners: little to no difference, because they never repay much anyway. 

Cost to taxpayers 

Around £4 billion for the 2022/23 cohort alone. 

2. Raise the repayment threshold with earnings 

Instead of freezing the threshold until 2030, raise it each year in line with average earnings. 

What it means for graduates 

• You’d start repaying at a slightly higher income. 

• This means lower monthly repayments for everyone earning above the new threshold – roughly £17 a month less by 2030. 

Who benefits most 

• On average, graduates would save around £8,000 in today’s prices over their lifetimes.  

• Middle earners: save around £14,000 over a lifetime. 

• Very high earners: may actually repay slightly more overall because they accrue more interest; unless they overpay early. 

Cost to taxpayers 

About £3 billion for the 2022/23 cohort. 

3. Lower payments and lower interest 

This is the biggest package of changes. 

The idea

• Cut the repayment rate from 9% to 5%. 

• Raise the repayment threshold. 

• Lower interest to CPI inflation. 

What it means for graduates 

• Monthly repayments fall by about half for most people – a big short‑term boost to take‑home pay. 

• Lifetime repayments also fall dramatically. 

Who benefits most 

• Middle earners: save around £36,000 on average. 

• Almost all graduates repay far less. 

Cost to taxpayers 

The cost to taxpayers would be significant; around £12 billion for one student cohort, and tens of billions for all Plan 2 borrowers. 

4. Lower payments now, longer loan term later  

Another potential idea is lowering the repayment rate but extending the loan term. 

The IFS modelled one version: 

• Repayment rate falls from 9% to 5%.

• The write‑off period extends by 9 years (from 30 to 39 years). 

What it means for graduates 

• Lower monthly repayments now. 

• But some graduates (mostly higher earners) repay more.

• Total repayments across the whole population stay roughly the same.

This is a way to help graduates in the short term without raising taxpayer costs overall, meaning taxpayers as a whole wouldn't need to foot the bill for this change.

Who benefits most 

• Lower and middle earners feel the biggest immediate difference. 

• Higher earners could repay more in the long run. 

So, what might actually happen to student loans? 

Right now, nothing is confirmed. In fact, despite student loans being in the news over the last few weeks, Rachel Reeves has recently confirmed that changes to student loans are unlikely to be announced during the Spring Statement. That said, she says they’ll continue to look at ways to make student loan repayments fairer.  

The key takeaway from the IFS is that each change helps different groups: 

• Cutting interest: best for high earners 

• Raising the threshold: best for middle earners 

• Big overhaul: best for almost everyone, but very expensive 

• Lower payments + longer loan: helps now, but you pay for longer 

It’s possible that if changes do happen, they’ll follow one of the above trajectories. In the meantime, it’s a good idea to engage with your student loan and make sure you’re only paying what you're meant to.

Millions of people unknowingly overpay each year; we explain how to check and how to claim a student loan refund if that’s you in our article on the topic.  We also dig into whether it’s actually worth overpaying to help you clear your balance early; spoiler: it’s usually not with the way the system is set up right now.  

Key takeaways

• These are only proposals — no student loan changes have been agreed, and nothing is expected in the Spring Statement.

• Plan 2 thresholds will freeze from 2027, meaning many graduates will repay more over time under the current system.

• Cutting interest mainly helps high and middle earners by reducing total repayment, but doesn’t lower monthly payments.

• Raising the repayment threshold lowers monthly payments and offers the biggest lifetime savings for middle earners.

• A full overhaul with lower payments and lower interest helps almost all graduates but would be very costly for taxpayers.

• Lowering payments now and extending the loan term eases pressure short‑term but means some graduates repay for longer.