The personal finance expert Martin Lewis upbraided the chancellor, Rachel Reeves, for freezing the threshold at which millions of graduates repay their loans, saying that this was treating student debts like tax. He was right, and Ms Reeves’s defence last weekend made his case for him. She argued that her decision would help to fund a reduction in patient waiting lists. But money used to repay student loans cannot simultaneously fund public services. In economic terms, such charges are taxes in all but name.
Mr Lewis’s reasoning was nuanced. He pointed out that freezing the repayment threshold is either a retrospective rewriting of the terms of a private contract or a targeted tax rise on a cohort of young people. Neither, he said, fits Ms Reeves’s claim that the policy is “fair and reasonable”. There are five student “loan” plans in operation covering most postgraduate courses, Scotland and three largely English student cohorts: entrants pre-2012, those between 2012 and 2023, and those post-2023.
The row focuses on the “plan 2” scheme, covering roughly 6 million people who entered university in England and Wales between 2012 and July 2023. For a plan 2 graduate, every pound earned between £30,000 and £50,000 already faces 20% income tax, 8% national insurance and 9% loan repayment – a 37% marginal rate. Freezing the plan 2 threshold, as Ms Reeves proposes from 2027, penalises these graduates by holding down the point at which repayments begin (roughly £30,000), so that as wages rise, a growing share of their income faces the 9% charge. This ensures more income is taxed at 37% for longer as incomes go up. The Institute for Fiscal Studies says this is indistinguishable from a tax rise.
Less than a third of full-time undergraduates in 2022-23 are expected to repay all their loan. Official figures show that students in England now graduate with average debts of £53,000, up 10% in a year as borrowing rises to cover rising costs. If someone earns £60,000, they should be taxed because they earn £60,000 – not because they went to university in 2014 rather than 2009, or because their parents could not afford to pay the fees upfront.
Education is not a luxury good. It is a productive investment. Yet wealthy families can buy their children out entirely, while ordinary households see wages disappear into “charges”. Bankers clear balances quickly; teachers pay for decades. It’s not rational to ask teenagers to gamble their future tax rates on choices they barely understand. The Treasury likes the status quo as the state offloads risk while funding universities upfront. But a political backlash is building. A large voting bloc of working-age graduates now faces debts that older generations escaped. Polling by YouGov found that 44% want some or all student debt written off. Over a third want the loans forgiven entirely.
Debt relief would be a good start – but not the end. Ms Reeves could fund public services through broad, progressive taxation; she could use the state’s balance sheet to invest and run higher deficits. Or she might continue to extract cash from one generation via the student loan system. The first two are honest. The third survives only because it permits ministers to say they haven’t raised taxes. Economically, the difference is meaningless. Politically, it is a calculated – and increasingly indefensible – evasion.
