A conversion of Restore Britain's original PDF, made to read better on mobile and for AI. Small conversion errors are likely. This site is not affiliated with or endorsed by Restore Britain.
For the first time since the Industrial Revolution of the 18th century, Britain has produced a generation entering adulthood with the prospect of being economically worse off than the generation that preceded it. This represents a profound failure of economic policy, as well as an injustice to millions of Britons who are being forced to bear the consequences of circumstances they did not create.
As this paper will show, interest charged on certain student loan plans has in recent years reached levels that impose a substantial burden on graduates. Many now face a situation in which their repayments merely cover a portion of the interest accruing on their loans, while their outstanding balances continue to grow. The resulting system can operate in practice much like a 'graduate tax.' When combined with the numerous other ways in which the economy has become increasingly difficult for younger people seeking to establish themselves, this risks creating what could be described as a generational wealth crisis. To restore a greater degree of fairness, we propose the abolition of interest on student loans in its entirety.
To understand why this is necessary, one must first understand how Britain's economy has changed over the course of multiple generations. The scale of this breakdown in the economic position of younger generations can be seen most clearly in the basic foundations of everyday life. In 1970, Britain's house price-to-earnings ratio was approximately 3.25, meaning that the typical house cost the equivalent of around 3.25 times the annual earnings of a typical worker.1 By 2025, the median home in England cost £300,000, compared with median full-time annual earnings of £39,300, producing an affordability ratio of 7.6. The equivalent ratio in Wales was 6.0. An average home in London costs 10.6 times the earnings of a typical full-time worker. The Office for National Statistics (ONS) regards five times annual earnings as a broad affordability threshold. Much of the United Kingdom is therefore substantially beyond the level that the ONS considers a reasonable benchmark for affordability. The ONS has previously found that between 1997 and 2016, median house prices increased by 259%, while median annual earnings increased by only 68%.2
The latest figures from the Institute for Fiscal Studies (IFS) show that 43% of people born in the late 1950s and early 1960s owned their home at age 25. Among young adults today, only 15% own their own home at age 25, while 42% live with their parents.3 The time required to accumulate the funds for a deposit has also increased substantially. A typical young family now takes around 12 years to save a first-time buyer deposit, compared with around seven years in the mid-1990s.4
This deterioration in housing affordability has had profound consequences for working Britons' ability to accumulate wealth. Research by the IFS found that, among middle-income young adults, homeownership fell from around two-thirds to just one-quarter between 1995 and 2015.5 The IFS attributed this primarily to the rapid increase in house prices relative to young adults' incomes. Average house prices grew around seven times faster than the average incomes of young adults over the twenty-year period.
At the same time that the cost of living has rapidly increased, the labour market has become increasingly competitive for graduates attempting to enter professional occupations. The Institute of Student Employers (ISE) found that employers received an average of 140 applications for every graduate vacancy in 2025. This compares with just 38 applications per graduate vacancy in 2002-03. In some sectors, the competition is greater still: retail, fast-moving consumer goods, and tourism roles attracted approximately 290 applications per vacancy.6
The Resolution Foundation found that millennials born in the late 1980s were earning 8% less at age 30 than Generation X born about a decade earlier had earned at the same age.7 The ISE reported that graduate hiring fell by 8% year-on-year in its 2025 survey.8 This is despite the fact that more than 1 million applications were received for graduate positions.9
This situation is bleak and must be corrected if our nation is to prosper. We at Restore Britain believe that it is our duty to leave our nation a better place than it was before. One means of alleviating the economic burden placed on working Britons is to abolish interest on student loans. Of course, there are also many other means of improving our prospects that we discuss in our economic philosophy paper and other future policy documents.10
As higher education loan balances continue to snowball, the adverse effects of rampant loan balance inflation will be felt by an increasingly large portion of the economically productive population. A student could be losing 9% of their income above £29,385 and 6% of their income above £21,000 if they have undertaken both an undergraduate and postgraduate course. These repayments represent a significant reduction in income, particularly when combined with rising living costs and the wider tax burden on earnings.
We at Restore Britain believe that you should be able to save for your future and for that of your family. Among other things, that means having a realistic prospect of paying off your student loan.
To understand how the current student loan system operates, it must be understood that the debt students accrue is treated differently from conventional debt. Most debts are balance-based, meaning that the more a person owes, the larger their monthly repayments. However, student loans are income-contingent, meaning repayments are determined primarily by earnings above a certain threshold.
Due to this system, two graduates with vastly different loan balances can make identical monthly repayments if they earn the same income. As a consequence, the central question for most graduates is whether their repayments exceed the interest accrued on the loan. This creates three broad repayment outcomes:
Low earners typically make very small repayments or none at all because their income remains near or below the repayment threshold. Interest continues to accrue, causing balances to grow over time, but much of the debt is ultimately written off after the repayment term expires. For these low earners, the rate of interest is of next to no concern because it has very little bearing on their overall repayments.
High earners experience the opposite dynamic. Their income generates large repayments that substantially exceed annual interest accrual, allowing them to clear the balance relatively quickly. Although they may repay large sums in absolute terms, they often pay less total interest over the lifetime of the loan than middle earners because they spend fewer years in repayment.
Middle earners have the most concerning outcomes in the current student loan system. These graduates generally earn enough to make substantial repayments, but not enough to repay the balance rapidly. Their repayments may only slightly exceed annual interest, particularly under high-interest repayment plans. Consequently, they can remain in repayment for decades and frequently repay more in total than either low or high earners.
The repayment structure raises serious questions of fairness. Middle earners can ultimately contribute more over their lifetime than both low and high earners relative to the amount initially borrowed. This creates an economically unhealthy distributional effect in which moderately successful graduates may face the greatest long-term repayment burden.
The average loan balance in England of a higher education borrower entering into repayment increased overall from £10,050 in financial year 2006-07 to £47,730 in 2025-26. This growth reflects a similar trend across the United Kingdom. In England, the total higher education loan balance has increased from £54.4 billion in financial year 2013-14 to £294.6 billion by 2025-26; in Scotland, it has increased from £3.1 billion in financial year 2013-14 to £10.4 billion by 2025-26; in Wales, it has increased from £2.6 billion in financial year 2013-14 to £11.8 billion by 2025-26; in Northern Ireland, it has increased from £2.2 billion in financial year 2013-14 to £6.0 billion by 2025-26. The EU borrowers' balance has increased from £0.7 billion in 2013-14 to £6.2 billion by 2025-26.11
In England, the total higher education loan balance has increased from £54.4 billion in financial year 2013-14 to £294.6 billion by 2025-26; in Scotland, it has increased from £3.1 billion in financial year 2013-14 to £10.4 billion by 2025-26; in Wales, it has increased from £2.6 billion in financial year 2013-14 to £11.8 billion by 2025-26; in Northern Ireland, it has increased from £2.2 billion in financial year 2013-14 to £6.0 billion by 2025-26. The EU borrowers' balance has increased from £0.7 billion in 2013-14 to £6.2 billion by 2025-26.
The current student loan system consists of several different repayment plans. It depends on when and where students have studied. The various plans available to borrowers differ substantially in their repayment thresholds, interest rates, and the length of time before any outstanding balance is written off. These differences are important because the financial consequences of interest vary considerably between borrowers on different plans.
Plan 1 applies primarily to borrowers who began an undergraduate course in England and Wales and across all courses in Northern Ireland before September 2012. Borrowers repay 9% of their income above the repayment threshold, which is £26,900 for the 2026-27 financial year. Interest rates are set based on the lower of the Retail Prices Index (RPI) or the Bank of England base rate plus 1%. These loans are written off 25 years after the borrower's course completion date (or at age 65 for certain older English pre-2006 loans).
Plan 2 applies primarily to students in England between September 2012 and July 2023 and is still issued in Wales. Borrowers repay 9% of their income above the repayment threshold, which is £29,385 for the 2026-27 financial year. The interest rate is linked to the Retail Price Index (RPI) and can rise to RPI plus three percentage points. Any remaining balance is written off after 30 years.
Plan 2 is unusual because the interest rate is partly determined by the borrower's income. Borrowers earning below the repayment threshold are charged interest at the RPI rate. Those earning between the repayment threshold and the upper income threshold are charged an interest rate between RPI and RPI plus three percentage points, while borrowers earning above the upper threshold are charged the maximum rate. This means that the borrowers who are earning enough to make substantial repayments also face the highest interest rates. As such, this plan has the highest interest rates.
Plan 4 applies primarily to Scottish borrowers who started an undergraduate or postgraduate course on or after April 2021. Borrowers repay 9% of their income above a threshold of £33,795. The interest rate is determined by whichever is lower between RPI and the Bank of England base rate plus 1%. The loan is cleared after 30 years.
Plan 5 replaced Plan 2 for new English undergraduate borrowers beginning courses from August 2023 onwards. Borrowers repay 9% of their income above a substantially lower threshold of £25,000. Unlike Plan 2, interest is charged at the RPI rate rather than RPI plus up to three percentage points. This means that Plan 5 has a significantly lower interest rate than Plan 2. However, Plan 5 also has a considerably longer repayment period. Outstanding balances are written off after 40 years rather than the 30-year period that applies to Plan 2.
Postgraduate Loans, which are commonly referred to as Plan 3, operate separately from undergraduate repayment plans. Borrowers repay 6% of their income above £21,000. Postgraduate loans normally accrue interest at RPI plus three percentage points. Any outstanding balance is eventually written off after the applicable repayment period. The remaining balance is written off after 30 years.
Postgraduate repayments can also be made simultaneously with undergraduate repayments. Consequently, a graduate who has both an undergraduate Plan 2 loan and a postgraduate (Plan 3) loan is expected to pay both simultaneously. For example, a graduate earning £50,000 with both types of loan would potentially repay 9% of income above the Plan 2 threshold and a further 6% of income above the postgraduate threshold. The combined deduction can therefore represent a substantial proportion of their earnings.
Today, the vast majority of the student loan balance is Plan 2 loans, with the share of Plan 1 decreasing over time and the share of Plan 5 increasing. In Scotland, Plan 4 took over from Plan 1 in 2021.
In recent years, Plan 2 loans have taken over from plan 1 loans in occupying the largest share of annual repayments. Plans 3, 4, and 5 have grown significantly since 2020-21, but still represent the minority of loan repayments. The 2019-20 spike was largely driven by the introduction of 'More Frequent Data Sharing' the more readily available data provided to SLC by HMRC. This resulted in almost two years' worth of customers' PAYE repayments processed by SLC in both 2018-19 and 2019-20 being recorded within the 2019-20 financial year.
There has been a substantial increase in the amount of interest accrued across the student loan book over the past decade. For some student loan plans, the vast majority of borrowers will never repay their loans before they are written off.
In England, annual interest accrued on higher education loans increased from approximately £0.9 billion in 2013-14 to £12.2 billion in 2025-26, 13.6 times higher. In Wales, interest increased 12.5-fold, from £41.2 million to £514.1 million; in Scotland, 8.9-fold, from £40.1 million to £358.3 million; and in Northern Ireland, 7.7-fold, from £27.5 million to £212.7 million. Taken together, approximately £13.36 billion of interest was accrued across the entirety of our student loan system in 2025-26 alone. It is worth noting that this is not total interest accrued, but interest added each year to the student loan book.
Much of the growth in student loan interest can be attributed in particular to Plan 2 loans, which have seen a significant increase in their interest accrued relative to other plans.
Only 39% of borrowers in the final Plan 2 cohort in England are expected to repay their loans in full, while 61% are expected to have some balance outstanding at the end of the repayment period and consequently have at least part of their loan cancelled. Even Plan 5 loans, created to take over from Plan 2 with more manageable interest rates, are estimated to have low repayment rates. Only 55% of full-time undergraduates entering under Plan 5 in England in 2025-26 are expected to repay their loans in full.12 Of the 82.6% of all higher education borrowers who are liable to repay in our nationwide tax system, only 50.5% made a repayment in the financial year 2025-26.
In 2025-26, across the country approximately £13.36 billion of interest was accrued across the entire student loan system, but only £5.94bn was repaid in total. Now, across the entire system, all loan payments only cover 44% of the interest accrued. If trends continue, which they are expected to without intervention, repayments will cover an ever-decreasing share of total interest accrued and interest will increase exponentially.
| Nation | 2025-26 repayments |
|---|---|
| England | £5.3bn |
| Wales | £242.6m |
| Scotland | £209.6m |
| Northern Ireland | £186.9m |
| UK total | £5.94bn |
Therefore, £13.36 billion does not represent the immediate cost to the taxpayer of abolishing interest. A substantial proportion of accrued interest would never have been recovered from borrowers under the existing system because many borrowers will not repay their entire outstanding balances before the applicable write-off date. The fiscal cost of abolishing interest is therefore determined not by the total amount of interest accrued, but by the amount of that interest that the government would otherwise expect to recover.
This explains why simply multiplying the total interest accrued by the number of years in the repayment system would substantially overstate the fiscal cost of abolition. The government already recognises that student loans are not conventional debts and that a significant proportion of the outstanding loan book is expected to be written off.
The appropriate question for this policy proposal is:
How much of the interest currently being added to student loan balances is the government actually expected to recover from borrowers?
That is the figure that should form the basis of an estimate of the annual fiscal cost of abolishing student loan interest.
Many of the issues raised in this paper have been at least somewhat understood by both the current and previous governments. As such, they have introduced caps on student loan interest rates to ensure that rates did not exceed thresholds they deemed unreasonable. At present, the Labour government has introduced a 6% cap on interest for Plan 2 and Plan 3 loans for the 2026/27 academic year. However, this cap - and others like it - are insufficient when it comes to addressing the problems caused by exorbitant interest rates.
Consider a Plan 2 borrower with an outstanding balance of £50,000 - within the range of an average amount borrowed. If the maximum interest rate of 6% applies, the loan would accrue approximately £3,000 of interest over the course of a year. Under the 2026-27 repayment threshold of £29,385, a Plan 2 borrower repays 9% of their earnings above that threshold. The income required to cover £3,000 of annual interest can therefore be calculated as follows:
0.09 × (x - £29,385) = £3,000
Solving for x produces an annual income of approximately £62,718.
A graduate therefore needs to earn approximately £62,718 per year merely for their compulsory repayments to equal the interest accruing on a £50,000 balance when the 6% maximum interest rate applies. This does not mean that the borrower would be repaying any of the principal. It simply means that their balance would stop increasing. Anyone earning less than this amount would make compulsory repayments, but those repayments would not be sufficient to cover the interest accruing on a £50,000 balance at 6%. Consequently, their outstanding balance would continue to increase regardless of repayment.
Only one in ten taxpayers in Britain earns £62,700 or over and these higher earners are typically older than the average taxpayer. Even with this cap, the vast majority of graduates will experience negative amortisation, in which a borrower makes compulsory repayments while their outstanding balance nevertheless increases because the interest accruing during the year exceeds the amount they have repaid. Given that the vast majority of graduates will never repay their student loans before they are written off, we have a de facto graduate tax.
Interest caps have also been introduced under Conservative governments. During the 2021-22 financial year, interest caps were introduced for Plan 2 and Plan 3 loans, averaging 4.5%. In response to further increases in RPI, these rates were capped again in September 2022, maintaining an average of 6.5% for the remainder of the year. Interest rate caps continued throughout 2023-24, with average rates rising to 7.3%.
Despite the continued application of caps, total interest accrued rose sharply, by 78.3% in 2022-23 and by a further 83.7% in 2023-24, to £15.3 billion. Without these caps, however, the sustained rise in RPI would have resulted in interest rates of approximately 13.5% for Plan 2 and Plan 5 loans, and around 16.5% for Plan 3 loans during 2023-24.
These caps have indeed been effective in limiting the excesses of double-digit interest rates, but failed to prevent the exponential accumulation of interest that traps many graduates in a Sisyphean struggle against their ever-increasing balance due. By capping interest each year, there is already a convention in place whereby, in part at least, a sizable portion of interest is already written-off. Thus, the abolition of interest in its entirety is a lasting resolution to a problem that has not been sufficiently addressed by interest caps.
We propose the abolition of interest on all student loans held by British nationals resident in the United Kingdom.
Eligible borrowers would be able to apply for the removal of both interest accrued in the past and interest accruing in the future by providing proof of British citizenship and proof of residence to the Student Loans Company (SLC). This requirement is necessary because the SLC's published data principally identifies borrowers according to domicile rather than nationality. An individual may, for example, be a French citizen who has lived in England for several years and therefore qualify as an English-domiciled student. Domicile is consequently insufficient to establish eligibility under a policy restricted to British nationals.
The policy would apply to British nationals who are resident overseas only upon their return to the United Kingdom. A British national living abroad would therefore retain the ability to apply for the abolition of interest if they subsequently return to reside here. Applications would remain open on an ongoing basis, rather than being restricted to a defined application window, ensuring that eligible citizens returning to Britain are not disadvantaged by the timing of their return.
Assessing applications would become an additional function of the SLC. Appropriate additional resources would be made available to ensure that applications can be processed without creating material disruption to the SLC's existing functions.
The precise fiscal cost of abolishing student loan interest cannot currently be calculated from published data. There are two principal limitations. First, the SLC does not routinely publish the nationality of borrowers, meaning that the population eligible under this proposal cannot be identified precisely from existing statistics. Second, aggregate repayment data do not provide a sufficiently detailed breakdown to establish precisely what proportion of repayments represents interest rather than principal.
It is therefore necessary to distinguish between interest accrued on the student loan book and the fiscal cost to the Exchequer of abolishing that interest. The two are not equivalent. The latest SLC statistics indicate that approximately £13.36 billion of interest accrued across the student loan system in 2025-26, while approximately £5.94 billion was repaid in total.
The appropriate measure of fiscal cost is the present value of repayments that would otherwise be received as a consequence of interest being charged, rather than the face value of interest accrued. This is consistent with the Department for Education's Resource Accounting and Budgeting (RAB) methodology, under which the government compares the initial outlay on student loans with the net present value of expected future repayments. A substantial proportion of accrued interest will ultimately be written off because many borrowers will not repay their loans in full. Such interest therefore does not represent an equivalent future fiscal receipt.
The scale of non-recovery is substantial. Current forecasts indicate that in England, for example, only 39% of borrowers in the final Plan 2 cohort are expected to repay their loans in full, while 61% are expected to have some balance outstanding at the end of the repayment period. Only 55% of full-time undergraduate borrowers entering repayment under Plan 5 in 2025-26 are expected to repay their loans in full.
Accordingly, the £13.36 billion figure should not be interpreted as the annual fiscal cost of abolishing interest. The eventual cost would be materially lower and would principally comprise the discounted value of interest-related repayments that borrowers would otherwise have made before their loans were fully repaid or written off. A definitive costing would therefore require the Department for Education and the devolved administrations to model the existing loan stock under a zero-interest counterfactual, taking account of repayment behaviour, loan balances, write-offs, and the timing of future repayments.
Although a fully costed estimate requires more detailed modelling, the available data provide an indication of the scale of interest potentially affected by the policy.
Of higher education borrowers liable to repay in 2025-26, approximately 82.6% were within our tax system and 50.5% made a repayment during the financial year. Applying these proportions sequentially to the £13.36 billion of interest accrued provides an indicative estimate of the interest associated with borrowers who were both within the tax system and actively making repayments.
Applying the 82.6% proportion to £13.36 billion produces approximately £11.04 billion. Applying the 50.5% repayment rate to this figure produces approximately £5.46 billion. On this basis, approximately £5.46 billion of the interest accrued in 2025-26 can be used as an indicative estimate of the interest associated with borrowers who were within the tax system and actively making repayments.
This calculation, however, assumes that interest accrual is distributed proportionately across borrowers according to their location within the tax system and repayment status. In practice, average loan balances, repayment behaviour and interest liabilities will vary between these groups. Moreover, some of the interest included in the estimate would ultimately have been written off and would therefore not have generated an equivalent fiscal return to the Exchequer. Equally, the figures used to calculate this figure may also contain a minority of non-citizens who have borrowed through our student loan system and hold employment here but do not possess British citizenship and would therefore not qualify for abolition of student loan interest.
The fiscal effects of the policy would also emerge progressively rather than through an immediate reduction in repayments equivalent to annual interest accrual. Repayment thresholds would remain unchanged, meaning that borrowers would continue to make repayments according to the existing income-based system. Removing interest would instead allow borrowers to reduce their principal more rapidly. Some would repay their loans in full earlier than they otherwise would, while others who would previously have carried an outstanding balance until the end of the repayment period would repay more of their principal before any eventual write-off.
The economic effect should therefore not be assessed solely in terms of revenue foregone by the Exchequer. Student loan balances entering repayment for graduates in England are approximately £47,900 to £53,000, representing a substantial financial liability. Under the current system, a portion of borrowers' repayments is devoted to servicing interest rather than reducing this principal balance. Abolishing interest would allow a greater proportion of repayments to reduce principal and could bring forward the point at which borrowers discharge their loans.
The income subsequently freed from student loan repayments could instead be directed towards saving, home ownership, business formation, consumption or other productive economic activity. The policy would therefore involve a transfer of resources from future debt servicing towards household and private-sector activity, rather than simply representing an equivalent destruction of economic value.
Britain should have an economy in which each generation can build upon the prosperity of the generation before it. Yet for many working Britons, the basic foundations of financial security have become increasingly difficult to attain. Housing has become less affordable, competition for graduate employment has intensified, and the cost of establishing an independent life has risen substantially. Within this wider deterioration, the student loan system places an additional and unnecessary burden on those who have undertaken higher education.
The present system is particularly difficult to justify because borrowers are often required to make substantial repayments while seeing their outstanding balances continue to grow. The scale of interest now being added to the student loan book demonstrates that this is not a marginal problem. In 2025-26, approximately £13.36 billion of interest accrued across our student loan system, compared with £5.94 billion in total repayments. For many borrowers, particularly those in the middle of the income distribution, compulsory repayments therefore do little more than service the interest accruing on their loans.
The objective is therefore not to eliminate the responsibility to repay the cost of higher education, but to ensure that repayment does not become an indefinite financial burden through the accumulation of interest. A greater proportion of every repayment should go towards reducing the underlying balance, allowing borrowers to reach financial independence sooner and leaving them with greater capacity to save, purchase a home, establish a family, start a business or otherwise invest in their future. In doing so, Britain can begin to restore the principle that every generation should have a realistic opportunity to build upon what it inherited rather than spend its working life servicing the accumulated costs of the past.
For these reasons, Restore Britain proposes the abolition of interest on student loans for British nationals resident in the United Kingdom, including the removal of interest already accrued as well as interest charged in the future. The relevant cost is the present value of the interest-related repayments that would otherwise be recovered, taking account of repayment behaviour, write-offs and the timing of future receipts. Such a figure would be markedly smaller than the total interest accrued.
1. Peter Somerville & Nigel Sprigings, Housing and Social Policy: Contemporary Themes and Critical Perspectives (London: Routledge, 2005). ↩
2. Office for National statistics, Housing affordability in England and Wales: 2025, March 2026. ↩
3. Institute for Fiscal Studies, How do living standards compare across generations, 29 July, 2026. ↩
4. Property Wire, Single first time UK buyer needs almost 12 years to save for a 15% deposit for a home, 8 May, 2017. ↩
5. Jonathan Cribb, Andrew Hood & Jack Hoyle, Institute for Fiscal Studies, Just 1 in 4 middle-income young adults own their own home - down from 2 in 3 twenty years ago, 16 February, 2018. ↩
6. Institute of Student Employers, 5 trends you need to know from ISE's Recruitment Survey 2025, 22 October, 2025. ↩
7. Resolution Foundation, An intergenerational audit for the UK, 13 November, 2023. ↩
8. Institute of Student Employers, Apprenticeships rise as graduate vacancies drop 8%, 15 October, 2025. ↩
9. Institute of Student Employers, ISE Student Recruitment Survey 2025, October 2025. ↩
10. Restore Britain, The Wealth of Our Nation, 3 August, 2026. ↩
11. Student Loan Company, Student Loans in England: Financial Year 2025-26, 2 July, 2026. ↩
12. Department of Education, Student loan forecasts for England, 9 July, 2026. ↩