Student loan interest payments balloon out of control: "Every extra pound earned above the threshold loses 9p straight away"

STUDENT loan interest payments have ballooned out of control as experts warn that “the system is broken” with "every extra pound earned above the threshold losing 9p straight away".

A new YouGov survey shows that Britons consider above-inflation rates of interest to be too much to charge graduates.

An estimated 5.8 million people who took out a student loan between September 2012 and July 2023 are facing ballooning interest payments.

The interest rate on plan 2 loans is linked to the Retail Prices Index (RPI) rate of inflation and can vary from month to month: in August 2024 it hit 8%. 

The loans are written off 30 years after you were first due to start making repayments, which is the April after you leave university. The debt is wiped even if you haven’t paid anything.

For many of these graduates, everything they hand over from their salary is dwarfed by the interest that is slapped on their debt every month.

The salary threshold, above which plan 2 graduates have to repay 9% of anything they earn, will rise to £29,385 in April this year, and normally it would have been expected to then rise again each year. 

However, Rachel Reeves announced it will stay frozen at that level until 2030 meaning more people will be pulled into the net and have to start repaying their loans or pay a larger chunk.

Philly Ponniah, Chartered Wealth Manager and Financial Coach at Philly Financial, claimed every extra pound earned above the threshold loses 9p straight away.

She said: "I’m seeing this with some younger clients, and it’s clearly disincentivising pay rises and progression at the margins. Every extra pound earned above the threshold loses 9p straight away, on top of income tax and National Insurance, while the loan balance often still grows. 

"When people work harder or get promoted and feel worse off in real terms, something in the system is broken. If higher effort just means higher deductions with no realistic path to clearing the debt, motivation drops. 

“For many, this no longer feels like borrowing for education, it feels like a permanent surcharge on success, and that’s a dangerous message to bake into the tax system.”

Samuel Mather-Holgate, Managing Director & IFA at Swindon-based Mather and Murray Financial, claimed it was a “shady tax scam”.

He said: "The government student loan scam is a shady tax scam, with millions of students entering into what is, in effect, a graduate tax scheme without fully considering the implications of this. 

“For most of their lives they will be paying an effective income tax rate of 9% higher than other works on relevant earnings above £30,000 with little prospect of paying it off and getting out of this marginal rate unless they become a Premier League footballer.”

Dawn Maria France, Editor-in-Chief at Yorkshire Women's Life Magazine, said that people with “modest incomes” are contributing beyond their means.

She added: "Graduates often struggle with monthly payments that do not adequately reduce their rising student loan debt. The decision to maintain a repayment threshold of £29,385 until 2030, while aimed at simplifying the process, inadvertently compels more graduates into repayment. 

"This situation leads individuals with modest incomes to contribute beyond their means, resembling a long-term graduate tax that lasts 30 years and offers limited relief. To address this issue, it is crucial to reassess the interest rate structure to align it with inflation better and revise repayment thresholds. 

"Such measures would afford graduates a fairer opportunity to manage their debts, ensuring that access to education does not become an overwhelming financial burden."

Michelle Lawson, Director at Fareham-based Lawson Financial, said young people have been saddled with mountains of debt.

She added: "Sadly, today's youth with such phenomenal amounts of debt before they start in life is not good and not a foundation for their life but some are left with no option if their chosen career requires it. Students should not be in a position where the debt grows more than it is repaid regardless of whether this is wiped off or not. 

"The UK has turned into a country that heavily taxes success which is a downward spiral to negative production. We are taking lessons from the Scandinavian model in most things, the government should put education and further education on the list. 

“We need the graduates, and home grown ones, to feel incentivised to learn and do better for themselves and enter the workforce. They should not be discouraged to enter a profession on the restriction of, and saddled with debt before they start.”

Colette Mason, Author & AI Consultant at London-based Clever Clogs AI, said university degrees are losing their value.

She added: "Traditional further education is losing its value in an economy dominated by fragmented, short-term, project-based work. For decades, in many careers, degrees functioned primarily as signalling devices for perceived potential, not as preparation for day-to-day productive competence. 

"That signal is weakening, while the cost of acquiring it keeps rising, and we lack a credible alternative for assessing reasoning ability and economic value. AI is changing that balance by dramatically lowering the cost of capability formation. Motivated individuals can now teach themselves market-relevant skills and assemble portable, personal ‘AI crews’ that move with them across jobs. 

“At the same time, rising housing and living costs have turned further education and unnecessary credentials into a material financial risk. For those already enrolled, exit is impossible, leaving many locked into long-term debt for qualifications that don't guarantee returns. You have to wonder what is the point?”