Plan 2 Student Loans explained: how do they work and were they mis-sold?

Plan 2 Student Loan repayments have hit the news, so we've sorted the facts from the fiction to explain what's really going on and why graduates are angry.

Credit: Brian A Jackson (background) – Shutterstock, Number 10 (foreground) – Flickr

Unless you've avoided all news and social media lately, you'll have seen that the debate around Student Loan repayments has been heating up.

In particular, people are discussing Plan 2 loans – and it seems like politicians and the media are listening.

But with all the chat, it's easy to get lost. What has the government actually changed? And how has it affected graduates? Allow us to explain.

Who has a Plan 2 Student Loan?

Plan 2 loans were issued to students:

• From England, who started university between 1st September 2012 and 31st July 2023
• From Wales, who started university at any time since 1st September 2012.

Our Student Loan repayment guide includes an easy-to-use table that explains which loan plan you're on, as well as the terms of each one.

What are the terms of a Plan 2 loan?

All Student Loans work in broadly the same way. No matter what plan you're on, you'll repay a proportion of your income over a threshold, you'll be charged some level of interest, and the loan will be wiped after a period of time.

But the specifics of these aspects will vary between plans. On Plan 2 Student Loans, the terms are:

• Graduates repay 9% of their earnings over a threshold (currently £28,470 per year).
• Interest accrues at RPI plus up to 3%. As a graduate, the additional percentage is applied on a sliding scale starting at the repayment threshold (currently £28,470 per year), with higher earners (currently £51,245 per year and above) charged the full extra 3%.
• Any remaining balance is cancelled 30 years after you first become eligible to repay.

Why are graduates angry?

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The debate focuses on two aspects of the system: the interest rate and the repayment threshold.

The interest rate

Many graduates are angry that the interest rate makes it difficult to reduce their debt, even if they're repaying thousands of pounds a year.

Some are also frustrated at how more interest is applied to higher earners. With most commercial loans, higher earners are typically charged less interest – but the opposite is true for Plan 2 Student Loans.

For context, the intention behind this system is that higher earners repay more and subsidise lower earners. As such, some would argue that the interest rates are progressive – in other words, they help lower earners by charging richer graduates more.

However, the very highest earners end up repaying less than graduates on lower salaries, because they can clear their debt before as much interest accrues. And, because the interest rate has been so high (and the additional amounts kick in at a relatively low wage), graduates need to earn a high salary just to offset the interest alone.

Because of this, and the changes to the repayment threshold, many feel that, in reality, the system is not progressive.

The repayment threshold

The repayment threshold has been a discussion point since the Budget, when the Chancellor announced it would increase in April 2026 (to £29,385), but then be frozen until 2030.

As earnings increase annually, this freeze means more low earners will start making repayments on their loans. It also means that those who are already making repayments will pay more each month.

When Plan 2 loans were launched, the government told borrowers that the threshold would rise annually with earnings. Since then, the threshold has been frozen on multiple occasions.

The interest rate threshold

Linked to the repayment threshold freeze, but spoken about far less, is a freeze on the interest rate thresholds, also until 2030.

For any graduate earning between the two thresholds (currently £28,470 and £51,245), this will effectively increase the additional percentage of interest added to their loan.

How much will the repayment threshold freeze cost graduates?

According to the Institute for Fiscal Studies (IFS), the repayment threshold freeze will cost graduates £93 more in 2027–28, eventually reaching £259 more in 2029–30.

Meanwhile, the Office for Budget Responsibility (OBR) estimates that the freeze will raise around £400 million annually for the government.

Will the Plan 2 changes apply in Wales?

The Welsh government has recently said it has "no intention" of following the English government in freezing the Plan 2 repayment threshold.

All Welsh students and graduates who started university on 1st September 2012 or later are on Plan 2, and Wales has never previously deviated from the English government on the loan's repayment terms.

At this stage, it's unclear whether this decision will lead to a new Student Loan repayment plan (e.g. a Plan 6, or a Plan 2a).

Were Plan 2 loans mis-sold?

Legally speaking, it seems that Plan 2 loans were not mis-sold. Martin Lewis has recently revealed that when he sought legal advice on challenging the 2015 threshold freeze, he was privately advised that he wouldn't win.

However, there is a strong moral argument that these loans were mis-sold.

First and foremost, the government told prospective students that their repayment threshold would rise annually with earnings. That threshold has been frozen multiple times.

There's also a wider debate around whether young people were (and are) financially literate enough to make an informed decision about taking out a Student Loan.

Many graduates say they had no idea how the interest worked – notably, that it could be above inflation and that their loan could still grow as they make repayments.

Others say the advice they received at the time – not only from teachers, university staff and other personal connections, but also politicians – was inaccurate, particularly regarding the cost and size of monthly repayments.

Does the interest rate affect repayments?

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On a monthly basis, the interest rate has no impact on what you repay. Monthly repayments are only determined by your salary (9% of earnings over a threshold), not what you owe.

But in the long term, the interest rate may affect repayments. Interest adds to the overall balance, meaning some graduates who would otherwise have repaid sooner, end up repaying for longer.

However, many graduates won't repay their original debt excluding interest, meaning the additional amount hasn't affected their repayments at all.

How much do graduates need to earn to start decreasing their Student Loan balance?

According to the IFS, graduates need to earn £66,000 per year before their repayments outweigh the added interest.

However, this is an average figure, and the exact salary required will vary depending on a graduate's balance.

Do Student Loans affect your ability to get a mortgage?

Student Loans (Plan 2 or otherwise) have no impact on your credit score.

However, they can affect your affordability rating – in other words, how much a lender believes you can repay each month, and therefore the amount and terms on which they give you a mortgage. Freezing the Student Loan threshold increases monthly repayments, therefore reducing what you can pay towards a mortgage.

Similarly, the threshold freeze also makes it harder for prospective homeowners to save for a deposit.

Is it better to take out a private loan?

For all their faults, the government's Student Loans are almost always a better choice than a private alternative.

Private student loans will affect your credit score, come with much higher interest rates (often over 10%) and will need to be repaid regardless of your income or employment status.

Should Plan 2 graduates try to clear their loans early?

In most cases, repaying your Student Loan early won't make financial sense.

As many graduates will eventually have some or all of their balance wiped, clearing the debt early could cost you more in the long term. If you have a large lump sum of money available, or have extra income you can spare each month, it's usually better to put it towards a house deposit or other debts.

That said, if you're a very high earner and you're confident you'll repay your loan before the 30-year cut-off, it may be cheaper in the long run to clear the balance early. This is because the earlier you repay, the less time interest has to accrue.

But even so, you may still choose to prioritise other costs or debts.

Has the government retrospectively changed the interest rate?

The government has never retrospectively changed the Plan 2 interest rate.

From the beginning, the interest rate has always been set at RPI plus up to 3%. The exact rate is usually set in September, using the RPI rate from March of the same year. This means the rate can and does change each year.

The only time this hasn't been the case was during the peak of the cost of living crisis, when rates were capped in line with what's known as the Prevailing Market Rate.

Although the interest rate on Plan 2 loans reached 8% in this time (and was applied to all borrowers, not just higher earners), it was still much lower than if the normal RPI plus up to 3% system had been used (which would have been up to 16.5%).

Has the government sold the loans to private companies?

In the past, the government has sold Student Loan debt to private companies.

However, this hasn't happened to Plan 2 loans – and in 2020, the government announced it would no longer be selling student loan debt.

How is Plan 5 different?

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Plan 5 was introduced in England for students starting university on 1st August 2023 or later. The key differences are:

• The repayment threshold is lower, at £25,000 per year
• The repayment term is 10 years longer, at 40 years
• The interest rate is lower, at just RPI, meaning graduates repay a maximum of what they borrowed in real terms.

Because they're repaying more each month, for a longer period, and with less interest, Plan 5 graduates are much more likely to repay their loans in full than those on Plan 2.

Our comment on Plan 2 Student Loans

Rachel Reeves has recently argued that the Plan 2 repayment threshold freeze is "fair and reasonable", but this couldn't be further from the truth.

When Plan 2 was announced in 2010, the government told 16- and 17-year-olds that, should they take out this loan to help cover their newly trebled tuition fees, their repayment threshold would rise each year with earnings.

But almost as soon as the first Plan 2 cohort had graduated in 2015, the government backtracked and froze the threshold for the first time.

Since then, the threshold has been unfrozen and frozen again at will, with the upcoming three-year freeze dragging even more low earners into making repayments. If we continue down this path, it won't be long until a full-time worker on the Minimum Wage will have to repay a Plan 2 loan.

If the Chancellor really wants a fair and reasonable Student Finance system, then reversing the threshold freeze would be a great place to start – and we'd encourage her to do so urgently.

Tom Allingham, Student Loans expert at Save the Student

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