June 2026
The University Challenge
A Plan for Plan 2
Executive Summary
The Plan 2 student loan settlement has become a symbol of political failure for a generation of young people. Nearly 5.5 million graduates who studied between 2012 and 2023 are repaying under terms set by the 2010-2015 coalition government and which have repeatedly been altered to the detriment of loanholders and the wider economy.[1] Soaring levels of debt interest and repeated threshold freezes have seen the system become a millstone around the necks of graduates. When combined with the wider pressures on the cost of living, Plan 2 loans act as a further constraint on the spending power and aspirations of young graduates now in the workforce. 57% of British adults consider the current settlement unfair - a majority found across every major political party - whilst only 15% think it is fair.
The Good Growth Foundation proposes two possible reforms for policymakers: (1) The Graduate Guarantee, an immediate uplift in the repayment threshold to £33,542, restoring the real value of the £25,000 threshold set in 2018 and reversing recent threshold freezes, combined with a legislative lock that increases the threshold in future years in line with inflation; or, as a secondary option, (2) a reduction in the repayment rate to 7.5%. The Graduate Guarantee (repayment threshold increase) is the more progressive policy and is our primary recommendation. Either proposal could be made affordable through likely capital budget underspends, but could also be supported through an extension of the loan term by up to 6-years.
[1] Smyth, Financial Times, ‘People on controversial UK student loan; yet, the model intended, plan’, March 2026. Accessed: 16 June 2026.
Introduction
The student loan system in England and Wales has come under immense public scrutiny in 2026 and it is little wonder why. The graduates affected by Plan 2 are now a critical cohort of the working population, yet the model intended to support them has become deeply regressive.
Between 2012 and 2023, Plan 2 loans supported those starting university who could not afford tuition or living costs. The system was designed as an income-contingent graduate contribution built on three interlocking principles: that those who benefit financially from university contribute to it; that those who do not benefit financially contribute less; and that those who choose not to go to university are not unfairly burdened with graduate debt through higher taxes.
Those principles have been steadily eroded. Repeated repayment threshold freezes and ballooning interest rates are weighing down a generation now in the workforce and tasked with driving the nation's future growth - and they are already struggling with cost-of-living pressures and a housing crisis.
The system is universally unpopular amongst loan-holders and the wider population. Our polling finds that 57% of Britons, including majorities from every major political party, now view the settlement as fundamentally unfair. Of loan holders who voted Labour in 2024 and would still vote, only half (50%) would say they would stay with Labour.
The Treasury Select Committee’s inquiry in March 2026 received over 52,000 responses, a near record high response rate to a Select Committee inquiry.[2] Respondents who hold plan two loans stated:
Over 95% think that the level of interest and repayment terms are or were not reasonable.[3]
Just under 75% felt that repayments had a material impact on their financial planning for the future.[4]
We can choose a different path, one where education remains a route to greater economic agency and choice, not a burden where the graduates driving Britain's economic growth are penalised for it. Any solution must centre equity, prioritising relief for those on lower and middle incomes.
Therefore, the Good Growth Foundation proposes a Graduate Guarantee, a substantial increase in the repayment threshold combined with a guarantee of future increases in line with inflation. By raising the repayment threshold, we can provide immediate relief to the graduate workforce, particularly those on lower incomes.
This paper and its recommendations focus exclusively on Plan 2, covering England and Wales undergraduates who started university between September 2012 and July 2023. Plan 2 covers the largest number of borrowers, 5.4 million graduates. Those on Plan 1 covering pre-2012 university entrants were offered far more favourable terms than those on Plan 2, with much lower tuition fees, resulting in considerably lower debt burdens. While there are similar structural problems with Plan 5, the replacement for Plan 2, for those who started university after 2023, with its lower threshold of £25,000 and 40-year repayment term, this also includes lower interest rates than those on Plan 2, demonstrating the need for a bespoke solution for Plan 2 graduates.
[2] Treasury Committee, Student Loans: More than 52,000 responses, May 2026. Accessed June 9th 2026.
[3] Ibid.
[4] Ibid.
[5] Smyth, Financial Times, ‘People on controversial UK student loan plan’, March 2026. Accessed: 16 June 2026.
[6] Hubble & Bolton, House of Commons Library, Higher education tuition fees in England, Pg 4, 2018.
[7] Gov.UK, ‘Repaying your student loan’. Accessed 2nd June 2026.
Part 1
Why Plan 2 is Failing
And why it matters
The Threshold has become a Stealth Tax
1.1
Successive governments have frozen the repayment threshold, the point at which graduates begin to pay back their loans. This has a similar effect to the recent fiscal drag of income tax thresholds, as it pulls low-earning graduates up into the repayment bracket. Consequently, more lower earning graduates are paying earlier in their careers and, consequently, paying back more.
Since Plan 2 loans first started being repaid by new graduates in April 2016, there have been two major freeze periods (2016-2018, 2022 - 2025) with a third freeze now announced (2027 - 2030). By 2030, the threshold will have been frozen for 8 of the 14 years of repayment. Recent freezes have coincided with significant periods of inflation.
The threshold freeze has extracted larger and larger sums from lower and middle-earning graduates, becoming in effect a stealth tax, eroding its original purpose and shifting the burden onto those least able to absorb it.
Lower earners are dragged into repaying earlier as their wages rise with inflation and lower and middle earners repay for most, if not all, of the 30‑year term, but their monthly payments often fail to cover the high interest costs, so the balance barely falls and more often grows.
Recent modelling shows that a graduate on around £47,000 with a £50,000 Plan 2 loan could repay as much as £136,000 over 30 years, nearly three times what they borrowed, because they are stuck in this cycle: earning too much to qualify for repayment but not enough to clear the debt quickly or even clear the interest.[8]
According to current estimates of the National Living Wage in 2027 by the Low Pay Commission and current OBR forecasts for wage growth beyond 2027, GGF has estimated that by 2030, the National Living Wage could reach £27,632 per year. Just £ 1,753 shy of the current threshold level, which remains frozen until 2030. This means that even those now earning just enough to get by will begin repaying.[9]
By contrast, higher earners can clear their balance much earlier and cut off years of interest, meaning some middle earners end up paying more in total cash terms than both lower and higher earners.[10] Rathbones estimated that a graduate starting on around £63,000 would only repay £91,000 in total, £45,000 less than a graduate on a £47,000 salary. Lower earners starting on £30,000 could expect to repay £50,000 over 30 years.[11]
The reputation of this system is driving a crisis in aspiration in future generations. The narrative surrounding student debt has shifted from an investment in the future to a deterrent to social mobility. Two fifths (38%) of 16-18-year-olds in England and Wales report they are less likely to apply to university due to the costs of student debt. This rises to almost half (45%) of teens from lower socioeconomic backgrounds (C2DE).
Teens from lower socioeconomic backgrounds are already less likely to aspire to go to university; only a third (35%) of 16-18 year olds from C2DE households plan to go to university as their next step, compared to almost half (47%) of those from ABC1 households.
Among the 16–18-year-olds who did not name university as their most likely next step, the most common reasons are a preference for an apprenticeship, training or work (29%), not wanting to take on student debt (26%) and a wish to start earning sooner (25%). Debt aversion and the desire to earn are, between them, cited more often than any doubt about academic ability or fit.
[9] Appendix Table on NLW calculations.
[10] Rathbones, ‘Graduates earning £45k-£50k repay most on student loans’, May 2026. Accessed 15 June 2026.
[11] Ibid.
Lost Legitimacy and Political Cost
1.2
Across the electorate, there is a cross-party consensus that the current system is unfair. Most (57%) consider the current settlement unfair, including a majority of Conservative (54%), Labour (51%), Reform UK (57%), Green (70%), and Liberal Democrat (71%) voters, all agree the system is unfair. Only 15% viewing it as fair, when presented with the current information.
For the public, an aspiration gap is fueled by the perception that the system primarily benefits high earners (49%) rather than the average graduate (36%). Furthermore, 42% of the public believes students from lower-income families see no benefit from the system at all. The proposed reforms aim to restore trust by ensuring that the greatest monthly benefits are directed toward those in the early-to-mid stages of their careers.
This collapse in legitimacy is not accidental; it is rooted in the way freezing the repayment threshold has increased the burden on lower and middle‑earning graduates.
As a voter group, Plan 2 loan holders are fragmenting in both directions at once. Of those who voted in 2024, most (54%) backed Labour, against 13% Conservative, 11% Green and 11% Reform UK. Today, on headline voting intention among likely voters, that lead has all but gone: Labour draws around 30%, barely ahead of the Greens on 28%, with Reform on about 16% and the Conservatives on 15%.
Of loan holders who voted Labour in 2024 and would still vote, about half (50%) stay with Labour. The largest defection is leftward to the Greens (30%); the rightward movement is smaller and split; just under a tenth each to Reform (8%) and to the Conservatives (7%).
Dissatisfaction with the current system is high amongst voters of all main political parties. Our national polling found 57% of the public consider the current settlement unfair, including majorities of Conservative (54%), Labour (51%), Reform UK (57%), Green (70%) and Liberal Democrat (71%) voters.
Part 2
Our Solution
Two ways to repair Plan 2
The Graduate Guarantee
2.1
After repeated freezes, the buffer between basic earnings and the point at which graduates start repaying their loans has been significantly eroded. By 2030, Plan 2 graduates earning just above the National Living Wage will be paying their loans back.
To restore trust with Plan 2 graduates and the system, we propose an immediate uplift in the repayment threshold to £33,542, restoring the real value of the £25,000 threshold set in 2018 and reversing recent threshold freezes. This represents an increase of £4,157, or around 14.1%, on the current threshold of £29,385. It would undo much of the fiscal drag that has pulled lower and middle-earners into repayment. Our proposed threshold also brings Plan 2 close to alignment with Plan 4 (for Scottish‑domiciled graduates), which has a threshold of £33,795.[12]
To guarantee that lower-earning Plan 2 graduates continue to be protected, we further recommend that this threshold increase annually in line with CPI inflation, and be enshrined in primary legislation, to prevent the Government from freezing thresholds as a fiscal lever. This would become a guarantee for graduates that future governments wouldn’t simply freeze thresholds again.
The effect of this recommendation would be immediate. Any graduate earning between the old and new thresholds (£29,385–£33,542) would stop making repayments altogether. Any graduate earning above the new threshold would pay 9% on a smaller slice of their income.
While the annual cash saving is the same for every borrower earning above the new threshold, approximately £374 per year (£31 per month), as a proportion of income, this has the biggest impact on lower earners as a proportion of their income.
The reform, therefore, concentrates its largest gains on the lower and middle of the graduate earnings distribution, where the current system bears down most heavily.
This saving represents over a month’s worth of food shopping for the average UK household, or two and a half months of energy bills, a highly significant saving.[13]
[12] Gov.uk, ‘Repaying your student loan’. Accessed 22 June 2026.
[13] Office for National Statistics, 'Family spending in the UK: April 2024 to March 2025', Figure 3. Accessed: 22 June 2026. Saving calculated as equivalent to approximately five weeks of average household expenditure on food and non-alcoholic drinks combined with electricity, gas and other fuels and 6 weeks of energy bills.
Repayment Rate Reduction
2.2
The second reform option modelled by the Good Growth Foundation reduces the repayment rate from 9% to 7.5%. Under the current rules, all Plan 2 borrowers earning above £29,385 pay 9p in every pound of income above that point. A reduction to 7.5% cuts that marginal rate by one and a half percentage points, reducing the annual repayment of every borrower above the threshold immediately.
Of the rates tested in our model - 8%, 7.5%, 7%, 6.5%, 6%, and below - only rates of 8%, 7.5%, and 7% can be made cash neutral to HMT within a realistic term extension. Rates of 6.5% and below cannot be offset within any 40-year term and would represent a structural cost to the Exchequer. The 7.5% rate is modelled as the primary option because it achieves cash neutrality at exactly 36 years, the same term extension as the Graduate Guarantee (threshold increase), making it the most direct comparator.
Unlike the Graduate Guarantee, where every borrower above the new threshold receives an identical flat saving of £374 per year (£31/month) regardless of salary, the benefit of a rate reduction scales proportionally with income. Because the repayment formula is 7.5% of income above the threshold, borrowers with higher incomes above the threshold save more in absolute terms.
The average annual saving across the full earnings distribution is approximately £320 per year, equivalent to around £27 per month. However, this average conceals significant variation:
The cross-over point, the income at which the rate reduction delivers a larger monthly saving than the threshold increase, sits at approximately £58,000–£60,000 (bands 9–10). Below that level, the Graduate Guarantee is more generous in cash-flow terms. Above it, the repayment rate delivers more. For the highest earners (band 12, ~£99,500), the monthly saving under a 7.5% rate is £88 per month, nearly three times the £31/month under the threshold increase.
Borrowers earning between £29,385 and £33,542, who benefit to a smaller extent in cash terms than those earning above the proposed threshold increase, do still benefit from a rate reduction. A graduate earning £31,926 (band 3) saves £38 per year (£3/month). This is a modest gain but represents the only income band where the rate reduction provides relief that the graduate guarantee does not.
What do Plan 2 Loan Holders Prefer?
2.3
Of the two reform models, the threshold increase is the more progressive and is more directly targeted at lower-middle earners. The polling suggests that support for a threshold increase is highest in the £20,000-£29,999 band, where Labour’s decline in support is also greatest. In bands where changes in political support are less pronounced, there is more preference for a rate cut, though by a narrower margin.
This suggests that the threshold increase has a particular concentration of support in the income bands where it also delivers the largest proportional gains. It also indicates that attitudes to reform are shaped by wider cost-of-living pressures facing this cohort. More broadly, dissatisfaction with the current system is not confined to one part of the electorate, which provides important context for how different reform options may be received. Compared with a threshold increase, alternatives such as capping interest or reducing the repayment rate direct larger gains to higher earners.
Winners and Losers
2.4
The rate reduction is a less progressive instrument than the threshold increase. Under the threshold increase the largest proportionate benefits flow to those earning just above the new threshold, precisely the lower-middle earners the system has historically hit hardest. Under a rate reduction, those same earners receive only a fraction of the benefit captured by graduates earning £60,000–£100,000+.
Part 3
Costings
The Fiscal Impact
3.1
Modelling the impact of changes to the student finance system is complex and subject to a range of longitudinal assumptions, including on earnings and repayments. There are broadly two impacts on the public finances, firstly, a one-off cost to increase the repayment threshold to £33,542, which is scored primarily in the year the increase takes place. This cost accounts for the immediate write-off of future repayments that will now not be made as a result of the new higher threshold. Secondly, increasing the threshold thereafter by inflation creates a smaller ongoing cost. The largest impact will therefore be an in-year cost to the public finances, with smaller ongoing costs which will all be charged primarily to the capital budget. As a result, there is a limited impact on the Government’s fiscal stability rule, which is based on a rolling spending target over five years.
To estimate the full fiscal impact, we have used the 2022/23 cohort of 108,340 borrowers. Raising the threshold to £33,542 costs approximately £949m for the 2022/23 cohort alone. We also note that the fiscal impact of freezing the thresholds from 2027 onwards raised circa £5.9bn in 2026/27.[14] Extrapolating the impact on the 2022/23 cohort and using the Autumn Budget 2025 figures, we estimate that the likely financial impact of increasing the threshold for all Plan 2 cohorts will be up to £10bn, primarily as a one-off capital budget cost in the financial year that the increase takes place.[15]
Reducing the repayment rate to 7.5% costs approximately £1.04 billion for the 2022/23 cohort, around £91 million more than the threshold increase at the same cohort size. We therefore expect this would result in a larger capital expenditure than the Graduate Guarantee (threshold increase).
We consider that the impact of either proposal could be offset in the current year by general capital budget underspends and by an overestimation of the current year’s financing requirements for indemnities to the Bank of England Asset Purchase Facility, which was based on assumptions made at the start of the Iran conflict.[16]
[14] Minister Josh MacAlister, Hansard Volume 781, ‘Student Loan System’, 2 March 2026.
[15] Budget 2025 freezes resulted in £5.9bn in additional revenues in the year the changes were made https://www.gov.uk/government/publications/budget-2025-document.
[16] House of Commons Library, ‘Main Estimates: Government spending plans’, Pg 20. 12 May 2026.
Loan Term Extension Option
3.2
Should alternative financing be required to ensure the upfront benefits to graduates are realised, our proposals could optionally be combined with an increase to the loan repayment period of up to a further 6 years. This also redistributes the cost of the loan to graduates later in life when their income is likely to be higher. We estimate that, absent any other financing from capital underspends, a term extension of 6 years would be required to make either proposal cash neutral.
Conclusion
For many borrowers, the Plan 2 student loan system no longer feels fair. Rising living costs and a worsening housing crisis mean repayments are not just a financial obligation, but a growing source of pressure that shapes life choices and limits opportunity.
Restoring trust means restoring what was promised. Increasing the repayment threshold to £33,542 would bring it back in line with the real value of £25,000 in 2018, while a legislative lock would prevent future erosion. Lowering the repayment rate would offer greater gains to higher earners, missing those under the greatest strain.
We have identified ways to fund this change. The real risk lies in failing to act, as frustration and financial insecurity push voters toward more extreme positions. This proposal offers a fairer settlement, focused on those who need it most and aligned with the priorities of voters. Labour must re-engage.
Appendix
Polling
The Good Growth Foundation conducted a poll of 2,005 British adults online between the 16th and 19th of January 2026. Figures were weighted to be both nationally and politically representative of all Britons, based on age, gender, education level, region, vote in 2019, vote in 2024, and political attention.
The Good Growth Foundation conducted a nationally representative survey of 16-18 year olds in England and Wales. Results were weighted to be representative of age and gender (combined), region and the socioeconomic grade of their household.
The Good Growth Foundation conducted a poll of 2,000 British adults online between the 13th and 16th of February 2026. Figures were weighted to be both nationally and politically representative of all Britons, based on age, gender, education level, region, vote in 2019, vote in 2024, and political attention.
The Good Growth Foundation conducted a poll of 500 Plan 2 Student Loan Holders between the 30th March - 10th April 2026. Results were weighted to gender, repayment status and graduation year.
How Plan 2 Works
Plan 2 loans apply to all students who took out loans for undergraduate degrees between 1 September 2012 and 31 July 2023. The loan consists of two elements: the tuition fee loan (to cover the cost of the tuition fees) and the maintenance loan (for living costs at university).
Graduates begin repaying their loan from the April after they graduate and repay 9% of income above the repayment threshold, currently set at £29,385 per year from April 2026.[17]
Interest on loans taken out begins accruing immediately, set at RPI (Retail Price Index) + 3% whilst studying and rising on a scale to a maximum of RPI + 3% post graduation, depending on income.[18]
The loans have a 30-year term limit from the point of graduation, meaning that regardless of the debt accrued, the loan will be wiped at the end of the term with no adverse consequences for graduates.[19]
Average graduate debt upon leaving university is approximately £53,000.[20]
In April 2026, The Government, in April 2026, announced a temporary cap on Plan 2 interest rates at 6% for the 26/27 academic year in response to widespread concern about the inflationary pressure caused by the US-Iran war.[21] This move offered some short-term relief to higher-earning graduates who were charged the highest interest rates on their loans, but it did little to support lower-earning graduates.
[17] Ibid.
[18] Institute for Fiscal Studies, Ogden, K,. ‘How do Plan 2 student loans work, and how have they changed over time?’ February 2026. Accessed: 2 June 2026.
[19] Ibid.
[20] Statista, D.Clark. ‘Average student loan debt on entry to repayment in the UK’, June 2026. Accessed 2 June 2026.
[21] Gov.UK, ‘Interest rate cap introduced to protect Plan 2’, April 2026. Accessed 3 June 2026.
With special thanks to…
Jade Azim
Billie Coulson
Tom Doherty
Louisa Dollimore
Kai Hain
Ben McGowan
Dylan Turner