SLTG0114

Written evidence submitted by Mr John Hubbard

Response to the Treasury Committee Call for Evidence: Student Loans

Executive Summary

This piece aims to show that the Plan 2 loan system is fundamentally flawed, operating as a regressive tax increasing both wealth inequality and generational inequality in the United Kingdom, as well as creating disincentives that have serious consequences for economic growth. Based on actuarial modelling, this evidence demonstrates that the system places a disproportionate burden on middle earners and requires urgent reform.

Key Failings of the Plan 2 System:

• Runaway debt: RPI+3 interest results in debts ballooning out of control before salary growth can catch up.
• Flawed measure of inflation: RPI lost its status as a national statistic in 2013.
• Wealth inequality: People reliant on government finance to access higher education pay far more in real terms than those fortunate enough to be able to pay upfront.
• Generational inequality: The UK has a growing generational divide with wealth concentrated among older property owners while young people face far higher housing costs relative to earnings. Student loans exacerbate this problem.
• Behavioural impacts: combined with other taxes student loan repayments encourage salary sacrifice and reduced working hours, reducing government revenue rather than increasing it.
• Mis-selling: Large loans of complex structure have been sold to young people with no financial experience and systematically misrepresented by government.
• Altering terms: No lender should have the power to alter the terms of a loan after it has been issued.

Proposal for reform

• Interest: To be brought in line with the correct measure of inflation, CPI, with no salary-dependent sliding scale.
• Threshold: To be restored to the repayment threshold that would have been expected when signing up to the Plan 2 loan (i.e. allowing for full earnings growth since 2012) and to increase in line with earnings growth each year.
• Consumer protection: Bring student loans under the same regulations as commercial loans.
• University funding: Tuition fees to increase in line with CPI each year for sustainable and transparent funding.

1. Introduction

1. I am submitting this evidence in a personal capacity as a graduate currently working as an actuary in the United Kingdom. I completed my university education under the Plan 2 system and therefore have direct experience of the repayment structure that affects many graduates entering the workforce today.
2. As an actuary, I regularly analyse long-term financial risks and funding structures. This professional background has enabled me to model and assess the current repayment structure in some detail.
3. Like many graduates, I see a substantial student loan deduction from my salary each month. Under the current interest structure these repayments are often insufficient to offset the interest accrued, meaning the outstanding balance can continue to grow despite consistent repayments.
4. For the remainder of this piece I have referred to affected people rather than graduates. This reflects the fact that by the end of this parliament, many of those affected will be in their late 30s, with families, and the word graduate can give an inaccurate connotation here.
5. My motivation for submitting evidence is threefold. First, I am concerned that the current structure may contribute to widening wealth inequality, as affected people who rely on borrowing to access higher education ultimately bear significant long-term interest costs while those able to avoid borrowing do not.
6. Second, student loans should be considered within the broader context of the growing generational divide in the United Kingdom. Young people today face, in real terms, higher tax burdens, greater housing costs, and poorer pension prospects than previous generations. Plan 2 loans risk placing a disproportionate long-term financial burden on younger cohorts, thereby exacerbating this divide.
7. Finally, I am concerned about the economic and behavioural effects. When loan balances increase despite regular repayments, borrowers may disengage or alter their economic behaviour in response. Many affected people have already turned to salary sacrifice options or reducing their working hours to limit their contributions; an unintended effect which may negatively affect economic growth.
8. Sections 2-5 of this submission highlight the flaws present in the Plan 2 system and the problems these create for young people as well as the wider economy. Section 6 presents my proposal for a reformed system that addresses these issues.

2. Interest rates

1. The salary-dependent sliding interest rate scale on Plan 2 loans has been specifically designed so that those who would have otherwise been able to start paying down their balance are instead trapped in debt, in effect paying an additional 9% in income tax for as long as possible.
2. The average Plan 2 debt at the time repayments begin is £53,000[1]. The following chart illustrates the gap between the contributions (blue line) and interest accrued (orange line) on this loan as of March 2026 (RPI = 3.2%) by salary.
3. With most affected people starting on a salary far below the £65,000 required to cover the interest, their loan balance grows despite making regular repayments. This is a runaway train: as the debt rises, the salary needed to meet the interest accrued also climbs. Without rapid and sustained salary growth, most will struggle to catch up.

4. The chart above also shows the interest that would be accrued if the salary-dependent sliding scale were removed (pink line). In that scenario, a salary of around £47,300 would be sufficient to cover the interest. While still above typical starting salaries, this is far more attainable than under the current structure.
5. The government has often justified the interest rate structure with the statement “this ensures those who benefit the most from university contribute the most to the system”, but this is flawed on three counts. Firstly, those who come from wealthy backgrounds who are able to pay the tuition fees upfront face none of this additional cost. Those from poorer backgrounds are therefore expected to pay more in real terms to access higher education than their more privileged peers. As such Plan 2 loans increase wealth inequality in the United Kingdom. If the interest was indeed supposed to operate as a “graduate tax”, then the option to get around this by paying upfront should have been removed when Plan 2 loans were introduced – for example, by applying an additional rate of tax payable on income over a threshold until retirement and foregoing the concept of a loan altogether. Secondly, those affected people who attain higher salaries already repay significantly more of their student loans in absolute (nominal and real) terms. Thirdly these affected people already contribute more into the system by paying both higher amounts and higher rates of income tax.
6. The intention of this system seems to be to compensate the government in part for the fact that some affected people will make little or no contribution towards their Plan 2 loan. Student loans are intended to finance the tuition costs of an individual’s own degree and should not function as a mechanism for redistribution. The balance of a loan should therefore represent no more than the inflation-adjusted cost of that individual’s education. Any additional costs should be funded transparently by the state through general taxation, rather than through hidden cross-subsidies imposed via artificially high interest rates. There is no prima facie reason why a higher-earning affected person should bear this cost rather than other higher earners.
7. 
   
   In fact, far from making the student loan system progressive, the salary-dependent sliding interest rate has actually made Plan 2 loan repayments a regressive tax. Middle earners who repay their loans later in the term face higher real costs for the same education than higher earners who are able to repay more quickly and “beat” the accrued interest. The following chart (blue line) shows in real terms (2026 monetary value) the projected lifetime Plan 2 repayments towards the average starting loan value of £53,000 across a range of starting salaries (assuming the same salary growth scale relative to CPI for all). The full set of assumptions used is set out in the appendix. An affected person starting on £37,000 per year is projected to pay £85,000 in real terms, £32,000 more than the original cost of their education. In contrast, an affected person starting on £74,000 per year would pay £65,000 in real terms, £20,000 less. This demonstrates that the current interest structure disproportionately burdens middle earners.
8. On the other hand, the chart shows that if Plan 2 interest was set in line with CPI (pink line) then all of those projected to pay off the balance before the loan is written off would be paying the same in real terms, removing the unfair advantage afforded to those wealthy enough to pay upfront, and removing the regressive nature of the current structure whereby after a certain point higher earners pay less.
9. The government has also argued that “interest rates are capped by the prevailing market rate (PMR) for comparable unsecured personal loans”. These rates are set by banks at levels designed to generate a profit even after allowing for a certain level of defaults. This is therefore a poor benchmark for a government-issued loan, which people rely on to access higher education.
10. The government itself has clearly recognised the flaws in the Plan 2 system, and in particular the sliding interest rate scale. Plan 5 loans, applying for those beginning courses after August 2023, have removed this feature and all loans will increase in line with RPI regardless of salary. While this change is welcome, there are millions of people still burdened by Plan 2 loans.
11. Coming onto the measure of inflation to be used for calculating interest on student loans, RPI lost its status as a national statistic in January 2013. The Office For National Statistics said in no uncertain terms “We do not think it is a good measure of inflation and discourage its use”. RPI is known to overstate inflation and typically runs about 1% higher than the correct measure of inflation, CPI. It should also be noted that the government does not use RPI for expenditure, eg the state pension, where it relies on CPI, and neither does the student loan earnings threshold increase with RPI. The government has continued to use RPI within only those elements of student loans which would artificially increase the balance of the loans and over-charge affected people.

3. Terms of loans and the Government's ability to change them 

1. Plan 2 loans function in many respects like commercial loans. Substantial sums are borrowed to cover tuition fees and living expenses, interest accrues on the outstanding balance, and repayments are made over a number of years. They differ only in that repayments start once income reaches a certain threshold and any outstanding balance is written off after 30 years. But for many, the repayments that are made before the balance is written off are substantial, and they are entering into a large financial obligation.
2. Financial conduct regulations exist precisely to protect consumers who may lack bargaining power or not fully understand the long-term financial consequences of finance agreements. They are intended to ensure that individuals are not exposed to unfair or misleading lending practices.
3. It is difficult to imagine a group of borrowers to whom these protections should apply more strongly than young people considering higher education. At the point the loan is taken out, many applicants have no financial experience, and the student loan system is often the only option to fund a university course – the very definition of borrowers lacking bargaining power. It is therefore astonishing that this form of lending operates outside of many of the consumer protections that apply to other forms of credit.
4. It is also difficult to think of any other walk of life where society would tolerate a lender altering the terms of repayment on a loan after it has been issued. This raises serious questions about whether borrowers are able to make an informed decision at the point the loan is taken out. A teenager cannot reasonably be expected to weigh the long-term costs and benefits of borrowing if the repayment terms themselves may be altered in the future.
5. The changing of repayment terms after the fact has seriously eroded trust in government among affected people.
6. There are clear parallels with previous financial mis-selling scandals. In particular, the issues surrounding student loans share several characteristics with the widespread mis-selling of payment protection insurance (PPI). In both cases the financial product involves a complex structure that many consumers struggle to fully understand and it has been promoted to individuals with limited financial experience.
7. Marketing and public messaging around student loans have also frequently emphasised affordability in the short term rather than the long-term cost of the borrowing. Comparisons made by government ministers between student loan repayments and the price of a cup of coffee[2] have reinforced the perception that the financial commitment involved is relatively minor, despite the large balances involved and the long repayment periods. Talks delivered in schools arranged by the Department for Education compared repayments to a phone contract and presenters were instructed to avoid the term “debt”.[3] Government messaging systematically misrepresented the financial reality of Plan 2 loans to those most vulnerable to misunderstanding.

4. Fiscal Policy

1. The system as set up means that an affected person earning £51,245 faces not only RPI+3% interest on their loan, but a 51% marginal tax rate.
2. Someone earning £51,245 could hardly be considered to be a high earner. On such a salary, securing a mortgage for a home is extremely challenging in much of the south of England and some other areas, especially for those supporting a family.
3. Such a high marginal tax rate encourages the take up of salary sacrifice options or reducing working hours to lower the tax burden. This is as a direct result of the fact that paying off a Plan 2 loan feels unattainable for all but the highest earners. Once borrowers consider the repayments as more of a tax than a loan repayment, the benefit of making repayments (ie reducing the size of the loan) are lost. An affected person with two children earning a salary of £75,000 working 5 days a week could instead work 4 days a week, reducing their salary by 20% or £15,000. Due to the 40% income tax, 2% employee NI, 9% student loan and c12% Higher Income Child Benefit Charge, their take-home pay is only reduced by £5,597. This raises the question, why work five days a week, or strive for career progression with additional responsibility when the majority of the financial reward is absorbed by the state? In this scenario, the government collects less revenue from tax and loan repayments than it would if there were no loan and the affected person worked five days a week. Data on working hours among affected people is not readily available, but anecdotally, around half of my peers have moved to a 4-day working week at my firm in a traditionally full-time financial services industry, and I am seriously considering this for myself. This drop in productivity has negative consequences for the economy.
4. In extreme cases, the behavioural implications of the Plan 2 system may extend to some affected people choosing to move abroad and disengage from the student loans system, including not reporting their earnings, or making repayments. 286,000 holders of student loans have moved overseas and of these c40% are non-compliant[4]. If these non-compliant individuals had instead remained in the UK, and we assume a salary of £50,000, the Exchequer could be foregoing c£2 billion in annual revenue in lost income tax, national insurance (employee and employer) and student loan repayments. While we cannot definitively point to student loans as the reason these people left the country, their non-compliance certainly demonstrates that a significant number are willing to disengage from a system they no longer view as fair or proportionate. As concerns over the scale of Plan 2 debt grow and as repayment terms are worsened, we must expect more people to consider moving abroad, (either those with the largest loans, or those high earners whose monthly repayments become substantial). This has serious consequences for the UK economy and the British taxpayer. This is not to justify non-compliance, but to recognise the economic cost when policy design creates incentives for it.

5. Fairness

1. In its 2016 report “The Intergenerational Contract Under Strain”[5], Parliament’s Work and Pensions Committee concluded that “the economy has become skewed in favour of baby boomers and against millennials”. It noted that decades of rapid house price inflation have concentrated wealth among long‑standing property owners, while many young adults are priced out of homeownership and face high private rents.
2. The Committee also highlighted that pensioner incomes and pensions have been largely protected from public spending cuts that disproportionately affected working‑age households, so that average pensioner household incomes now exceed those of non‑pensioners after housing costs. It found that today’s younger workers endure a lower standard of living than today’s pensioners did at the same age.
3. The work of Professor Hills, cited in the Committee report, estimated that those born in the 1950s/60s would receive more in services and benefits than their lifetime tax payments. The Committee report concluded that “In order to achieve fiscal balance by the end of today’s infants’ lifetimes, as yet unborn people would each need to contribute an average of £160,000 in net terms”.
4. The very group among whom the largest share of wealth is concentrated benefited from free university tuition and continue to benefit from a triple‑locked state pension and additional support such as winter fuel payments, funded by government borrowing; a debt that will ultimately fall on today’s young people. By contrast, today’s young adults face far lower rates of property ownership, lower real‑term incomes, and mounting student debt, leaving them financially constrained at an age when their predecessors were building wealth.
5. This combination of circumstances contributes to a broken social contract, whereby the economic burdens of a struggling economy disproportionately fall on young people.
6. While most affected people would recognise that universally free university tuition is unlikely to be sustainable, the reforms proposed in Section 6 provide a way for the government to reform the student loan system in a way that addresses these problems and restores some balance between generations.

6. Proposal for Reform

1. As discussed in Section 2, RPI is not a suitable measure of inflation for interest rates to be applied to student loans. Furthermore, any interest rate above inflation perpetuates wealth inequality. As such, interest on all Plan 2 loans should be brought in line with CPI irrespective of salary. Removing the disincentive for career growth will be a positive contribution to economic growth.
2. A full-scale long-term costing requires more granular data than is currently publicly available and is therefore left for HM Treasury to assess. An adapted version of the actuarial modelling used for Figure 2 indicates that the total cost to the Exchequer of aligning Plan 2 interest rates with CPI would be in the region of £30 billion in Net Present Value (NPV) terms. It is important to note that this cost is heavily back-ended; there would be little to no impact on government cash flow in the first 10 years, with the annual cost only gradually increasing to a maximum of approximately £2 billion in any single year (NPV). To put this into perspective, the government’s total annual expenditure is currently forecast at approximately £1,370 billion (2025/26)[6]. A peak annual cost of £2 billion in today’s terms represents less than 0.15% of total government spending. A small price to pay for a reform that would significantly reduce wealth inequality, restore generational fairness, and remove major productivity disincentives from the UK economy.
3. To restore trust in government, repayment thresholds should increase each year in line with CPI, with an initial uplift where necessary to return the terms of the loan to those that affected people expected when they signed up. Furthermore, the government should make all student finance subject to the same regulations as commercial loans such that the government would be subject to legal proceedings if it ever worsened the terms of the loans.
4. At the same time, we should recognise that universities are an important part of the British economy and so should be funded in a sustainable way. I would therefore propose that tuition fees themselves are also increased annually with CPI. This ensures that the real cost of education is consistent over time for all of those deciding to pursue higher education.

7. Conclusion

1. The Plan 2 loan imposes disproportionate costs on affected people, acts as a regressive tax perpetuating wealth and generational inequality, took advantage of vulnerable and uninformed young people while operating outside of the regulatory framework for lenders, and encourages unintended behavioural changes which will have negative consequences for the economy.
2. Reforming the system as set out in section 6 - linking repayments, tuition fees, and the repayment threshold to CPI and ending the ability of the government to worsen the terms of the loan – would create a fairer, more transparent and more sustainable system while going some way towards restoring trust in government. It would also encourage voluntary repayments increasing government revenues in the short term, reduce the excessive financial burden on affected people and remove disincentives that currently limit productivity and career progression, thereby supporting the broader UK economy.

8. Appendix

Modelling assumptions underlying Figure 2 - lifetime repayments in real terms

March 2026