SLTG0153
Written evidence submitted by Mr Fahim Khan
Fahim Khan
Former student, The University of Law
Former Student Union Vice President, Moorgate Campus
Student Representative of the Year
Disability Rights Activist
Founder, Case 2 Rights C.I.C.
Independent contributor on higher education finance and graduate outcomes
(Submission made in a personal capacity)
Inquiry: Student loans and taxation of graduates
The current student loan regime, particularly for Plan 2 borrowers, is no longer well understood or experienced as a conventional loan. In practical terms, it operates for many borrowers more like a long-term graduate contribution or additional tax, but without the clarity, transparency, or fairness that such a system would normally require. For many borrowers, it is best understood not as a conventional loan at all, but as a badly designed graduate tax: one that retains the psychological burden of debt while distributing costs in a way that is often opaque and regressive in practice. The problem is not simply that graduates contribute towards the cost of higher education. The present model, which combines debt-like psychology with tax-like operation, has been worsened retrospectively in material respects and now places disproportionate burdens on those trying to establish themselves in adult life. That makes the current structure difficult to defend on grounds of fairness, transparency, or economic rationality.
1a) Should a student loan incur interest?
Some interest may be justifiable to reflect administration and the time value of money. However, in a state-backed student finance system intended to widen access to education, interest should not be structured in a way that causes balances to grow faster than many borrowers can realistically reduce them. Once a large proportion of borrowers are making repayments while their balances continue to rise, the system ceases to feel like fair cost-sharing and becomes a long-term, escalating burden.
1b) Should the interest on a student loan be dependent on income?
If income-contingency is retained, it should operate in a genuinely fair way. In principle, linking cost to ability to pay can be justified. In practice, however, the current structure has often produced the opposite of what borrowers would expect from a fair system. Higher earners may clear balances sooner and stop paying, while lower- and middle-earners can remain exposed to repayment for far longer. Any income-sensitive design should therefore be assessed not just by monthly affordability, but by total lifetime burden.
1c) Should the interest on a student loan be fixed to RPI, CPI, or another measure?
If interest is to be linked to inflation, CPI is far more defensible than RPI. RPI has long been criticised as a less reliable and more inflationary measure, and the Office for National Statistics has advised against its general use. It is therefore difficult to justify continuing to use RPI in student finance, particularly given that the government has moved away from it in many other contexts. A system tied to RPI, especially with an additional margin on top, risks overstating the borrower’s liability in a way that is hard to reconcile with fairness, consistency, or transparency.
2) Are interest rates above the rate of inflation on a student loan fair?
No, not in the present context. Above-inflation interest may be defensible in some forms of commercial lending, but student finance is not ordinary commercial lending. It is state-backed, compulsory in practice for many students, and often entered into at age 17 or 18. Above-inflation interest rates have led many borrowers to repay significant amounts without materially reducing their debt. That is not a persuasive basis for calling the system fair. For many borrowers, interest begins accruing from the moment the first payment is made, even while they are still studying, further widening the gap between what they believed they were taking on and the reality of how the balance grows.
3) Was it fair for the Government to block the interest rate on student loans from going negative when the index the loan was pegged to went negative?
No. If the justification for index-linking is that the loan should move with the chosen measure, then that principle should apply consistently. Preventing downward movement while preserving upward movement is one-sided. It gives borrowers the downside of indexation without the full upside, undermining trust in the system's coherence and fairness.
4) Should student loans be branded as loans, or as something else? Does calling a student loan a loan exacerbate dissatisfaction with the product among its users?
For many borrowers, “loan” is now a misleading description. A conventional loan is generally understood to involve borrowing a sum, repaying it, and reducing the balance over time. For many student borrowers, that is not their lived experience. Repayment is earnings-contingent, operates through payroll deductions, often lasts decades, and for many borrowers, the balance continues to grow despite repayment. In substance, the system behaves more like a graduate contribution or tax-like charge than a normal loan. Continuing to present it as a standard loan contributes to misunderstanding, dissatisfaction, and a sense of having been misled.
5) What proportion of a student’s university education should be funded by the student versus being subsidised by the state?
The current balance appears too heavily weighted towards the student, especially under Plan 2. Higher education creates both private and public benefits: graduates may earn more, but society also benefits from a more skilled workforce, stronger public services, higher productivity, and broader civic participation. A system that pushes too much of the long-term burden onto students, especially those from less affluent backgrounds, is unlikely to be either equitable or sustainable. A greater degree of public subsidy is justified, particularly where the present model has drifted far beyond what many would regard as a fair shared contribution. This is especially important because the current system does not burden all students equally. Those from wealthier households are more able to avoid or reduce borrowing for living costs, whereas poorer students often have to borrow the maximum available simply to participate. The result is that the students with the least private financial support can leave university with the largest debts, making the current student-state balance difficult to defend as equitable. There is also evidence that a system originally justified as a model of shared cost has drifted towards one in which borrowers effectively bear far more of the total burden than originally envisaged.
6) Should the terms of a student loan be able to be changed by government once the loan has been taken out?
As a general principle, no. If the government wants to change the terms for future borrowers, that is a political choice. Changing the practical burden on existing borrowers after entry undermines certainty and fairness. Even if amendment powers are formally documented, that does not answer the separate question of whether retrospective worsening is just or legitimate. Borrowers should not be asked to commit to a major long-term financial product only to discover that key elements can later be altered against them.
7) Does the process around student loans provide enough information, in a clear and fair form, given that this may be the first credit contract for many people?
No. The system may be documented, but that is not the same as being genuinely understood. Many students take on these obligations at 17 or 18, often in an environment where university is strongly encouraged and where the product is explained in simplified or reassuring terms. That is not a sufficient basis for claiming meaningful informed understanding of a long-term, high-value financial commitment. Many borrowers do not appear to have understood how interest, repayment thresholds, long write-off periods, and inflation interact over a lifetime, nor that interest can accrue from the outset, and balances may continue rising despite repayment. The long-run effect on affordability, including housing and savings decisions, can therefore be substantial even if the product does not resemble ordinary commercial debt.
8) Should loans from the Student Loan Company be compliant with FCA rules and principles and the Consumer Duty?
Yes. The fact that student finance is state-backed does not reduce the need for fairness, clarity, and accountability; if anything, it increases it. These products can affect a borrower for most of their working life and often involve sums far larger than those in forms of credit already attracting regulatory scrutiny. It is difficult to justify a position in which relatively small consumer credit products may attract stronger fairness disciplines than student finance, despite the latter’s scale and duration. FCA-style principles and the Consumer Duty would likely improve transparency and reduce avoidable misunderstanding.
9) Does changing the terms of a government loan contract once it has been entered into erode trust in Government?
Yes. Trust depends not only on the formal legality of a change, but on whether people feel that government has acted consistently and fairly. Borrowers experience retrospective changes to repayment thresholds or similar terms as a moving of the goalposts. That weakens confidence not only in student finance but in government-backed financial arrangements more broadly.
10) Might changing the terms of a loan once it has been taken out affect future take up of student finance through lack of certainty in the loan product?
Yes. If prospective students see that terms can worsen after enrollment, they are more likely to question whether the product is trustworthy. This is especially important for students from less affluent households, who may already be more debt-averse because they cannot rely on family wealth to offset the risk. The effect may not be an immediate collapse in participation. Still, it is likely to increase caution, deter some applicants, and encourage others to seek alternatives such as apprenticeships or direct work. This is not a hypothetical concern. Public debate around the current system is already influencing younger students’ perceptions of whether university remains financially worthwhile, particularly where alternatives such as apprenticeships appear less risky.
11) Are there examples of government unilaterally changing the terms and conditions of finance provided to companies or pensioners or other groups in the economy?
There may be examples in other areas of policy, but that does not, in itself, justify doing so here. Student finance is unusual because it is entered into very early in life, is often poorly understood in practice, and can shape a person’s finances for decades. Unilateral changes in that context raise particularly acute concerns about natural justice, legitimate expectation, and the credibility of public institutions.
12) Should the incomes of higher-earning graduates be used to subsidise the loans of lower-earning graduates?
In principle, some cross-subsidy can be justified in a progressive system. The problem is that the current model does not always produce outcomes that feel genuinely progressive in practice. Lower and middle earners may remain in repayment for much longer, while higher earners can more easily clear balances and exit the system. A fair model should ensure that those with the greatest ability to pay contribute more overall, not merely more quickly monthly. If cross-subsidy is to be defended, it must be transparent and must actually operate progressively over the borrower’s lifetime. Indeed, one of the central defects of the present system is that those who earn less can remain liable for much longer and may ultimately contribute more over time than higher earners who clear their balances sooner and exit the system earlier.
13) How does the student loan system interact with the taxation system, including marginal rates?
The interaction is one of the strongest reasons the issue has become politically salient. For many borrowers, student loan repayments function as an additional marginal deduction layered on top of income tax and national insurance. In practice, this creates a tax-like experience, particularly for graduates on ordinary professional salaries who are trying to save, rent, buy a home, or start a family. For some borrowers, particularly when other thresholds are considered, the effective marginal burden can become extremely high. That has consequences not just for fairness but for work incentives, labour supply, savings behaviour, and broader growth. A Treasury inquiry is right to examine this, as the issue is no longer confined to higher education policy; it now sits squarely at the intersection of taxation, public finance, and long-term economic behaviour. It is also important to distinguish between reforms that improve headline optics and reforms that materially ease borrower pressure. For many lower and middle earners, measures such as raising the repayment threshold may do more to reduce the real monthly burden than simply lowering the headline interest rate after substantial interest has already accrued. That distinction matters if the policy aim is to improve disposable income, work incentives, and household resilience.
14) Do student loans currently deliver equitable shares of burdens and benefits between generations?
No. More recent cohorts have faced higher fees, harsher interest structures, longer repayment periods, and weaker wider economic conditions than many earlier cohorts. At the same time, they face far higher housing costs and a more difficult labour market, where the graduate premium is less secure than it once was. That means newer graduates are often expected to shoulder a heavier burden in return for a less certain advantage. The result is a serious intergenerational fairness problem. The current model asks younger people to absorb risks that earlier cohorts did not face to the same extent, while being told the system is fair. That claim is increasingly difficult to sustain. Intergenerational unfairness is compounded by the fact that newer cohorts are facing these burdens in a much harsher wider economy: weaker housing affordability, less secure labour-market returns, and higher barriers to saving and family formation. In that sense, the issue is not simply that recent graduates pay more; it is that they are being asked to carry heavier, longer-lasting liabilities at precisely the stage of life when earlier generations were better able to build stability and assets. The effect is not abstract: it now bears directly on mortgage affordability, pension saving, family formation, and the timing of financial independence, meaning that the burden of student finance increasingly shapes the entire life course of younger cohorts.
The central issue is not whether graduates should contribute something towards the cost of higher education. Many people would accept that they should. The central issue is whether the present mechanism is fair, transparent, and economically coherent. In its current form, especially for Plan 2 borrowers, it is not. It is a system that many borrowers experience as opaque at the point of entry, punitive in operation, regressive in effect, and destabilising in its interaction with later-life finances. Reform should therefore focus not only on headline politics, but on restoring clarity, predictability, and a genuinely fair allocation of burden between graduates, the state, and wider beneficiaries of higher education. Unless this is addressed, the system will continue to undermine not only trust in student finance but also confidence in higher education itself as a credible, fair, and socially legitimate route to opportunity and advancement.
April 2026