SLTG0224

Written evidence submitted by Intergenerational Foundation

Call for Evidence response: Student loans and the taxation of graduates

To:               The Treasury Committee

By:               The Intergenerational Foundation

Date:               11 April 2026

The Intergenerational Foundation (www.if.org.uk) is an independent think tank researching fairness between generations. IF’s guiding principle is that policy should be fair to all – the old, the young and those to come.

Introduction:

The Intergenerational Foundation has long researched and campaigned on the unfairness of the student loans system. We therefore welcome the Treasury Committee’s inquiry.

In recent months, the student loan system has come under increased public scrutiny. Much of this debate has focused on Plan 2 loans issued to the 11 cohorts who entered higher education between 2012/13 and 2022/23. That scrutiny is long overdue. Above-inflation interest rates have caused debt balances to rise while many graduates repay thousands of pounds each year. The 9% repayment rate has led to high marginal tax rates. Many graduates feel they were “mis-sold” student loans because they were not made properly aware of the burden these loans would impose later in life. Retroactive freezes to repayment thresholds have only deepened that sense of unfairness.

The recent backlash also reflects the broader pressures facing young people. Over the past two decades, the incomes of younger workers have largely stagnated and the “graduate premium” has declined.[1] Students are graduating into a weaker labour market, with fewer graduate vacancies and rising youth unemployment. High house prices and rents have squeezed living standards and pushed homeownership further out of reach. As a result, traditional milestones such as moving out, starting a family, and saving for retirement are increasingly delayed. At the same time, rising wealth-to-income ratios have made intergenerational transfers more important, weakening social mobility and undermining the link between work and economic security.[2]

But the student loan crisis is not just the result of high interest rates or retroactive changes to loan terms. In our view, the underlying cause is the near-total withdrawal of state funding from higher education. What was intended to be a mixed-funding model has become almost fully privatised. The IFS predicts that the government will make a net gain on the loans issued to the last Plan 2 cohort who entered university in 2022/23. Even after accounting for direct teaching grants, that cohort is expected to cover 97% of the total cost of their higher education.[3] That is a profound shift in a relatively short period of time. When Plan 2 was introduced in 2012/13, it was estimated that the state would subsidise 50% of the total cost of higher education.[4]

As such, we believe the ultimate aim of future reform should be to restore the original mixed-funding model through greater public investment in higher education. Changes to interest rates and repayment thresholds may alter who pays, and when. But on their own, they do not solve the deeper problem. They simply redistribute the burden within younger cohorts. Greater public investment is also in the national interest. A more highly educated workforce supports productivity, economic growth, and future tax revenues. Graduates also tend to have better health outcomes, lower rates of criminal offending, less reliance on the welfare state, and higher levels of civic engagement.

Such an investment would also help to rebuild the intergenerational contract. Over recent decades, public resources have increasingly been skewed towards older generations, often at the expense of younger generations. Our research has found that the gap in total government spending per pensioner compared with per child has risen by 170% in real terms since the early 2000s.[5] An ageing population is likely to widen that imbalance further, with the costs falling on younger and future generations. In that context, public funding for higher education should be seen as an intergenerational transfer: a way for current and older generations to invest in the life chances and opportunities of younger and future generations.

Finally, the problems with Plan 5 must not be ignored. Plan 5 now applies to most current students, and for many lower and middle earners it will be considerably more burdensome. The loan term has been extended from 30 to 40 years and the repayment threshold has been lowered. As a result, many graduates will repay more over their lifetime than they would have under Plan 2. We estimate that lower-quartile earners will repay an additional £21,800, while median earners will repay around £16,000 more. The limited scrutiny of Plan 5 points to a deeper problem: the effects of student finance reforms are often delayed, only becoming fully visible as graduates progress through their careers. Policymakers should not wait for those issues to become politically salient over the next few decades. If Plan 5 is not addressed now, history will repeat itself.

Note: All figures on expected lifetime repayments are produced from our internal student loan model and are expressed in 2025 prices unless otherwise specified.

Interest rates:

1) Should a student loan incur interest? 

Ideally, student loans should not accrue interest above inflation. However, linking the interest rate to CPI inflation is fair and reasonable, as it preserves the real value of the loan.

1b) Should the interest on a student loan be dependent on income? 

Interest rates that are contingent on earnings are not inherently unfair. For example, a system could be designed in which lower earners face below-inflation interest rates. The problem with Plan 2 is that this mechanism is used to impose interest rates above inflation on higher earners.

It also makes the system more complex than it needs to be. Many graduates are likely unaware that their interest rate depends on their income. This is clear from recent media coverage, which often fails to explain that interest rates vary with earnings.[6]

The main purpose of this feature was to create a cross-subsidy within the system. Higher earners faced a higher interest rate and were therefore expected to repay more than they initially borrowed in real terms. This helped to offset loan write-offs for lower earners. As we explain in our response to Question 12, the cross-subsidy is unfair. Interest rates on student loans should therefore not depend on earnings.

1c) Should the interest on a student loan be fixed to RPI, CPI, or another measure? 

Interest on student loans should be linked to CPI. It is the most widely used measure of inflation. RPI is typically higher and has been deemed not fit for purpose since 2013.

The difference between CPI and RPI as an uprating mechanism is not trivial. Our modelling estimates that, for median-earning Plan 5 graduates, using RPI rather than CPI increases lifetime repayments by around £4,800.

2) Are interest rates above the rate of inflation on a student loan fair? 

Above-inflation interest rates mean that graduates who repay the loan in full will repay more than they originally borrowed in real terms. There are three possible justifications for this. We do not find any of them convincing. 

The first, and most common, is the argument for cross-subsidy. Above-inflation interest rates mean higher earners repay more than their original loan in order to offset loan write-offs for lower earners. As we explain in response to Question 12, we do not believe that is a fair principle.

The second justification is that student loans are a legitimate way for the government to raise revenue, similar to general taxation. In practice, Plan 2 often operates like a de facto income tax. But there is no evidence in the documents surrounding the introduction of Plan 2, or in the information provided to students, that loans were justified on that basis.[7] Using student loans as a backdoor form of taxation would depart from their stated purpose: to support students through higher education.

The third justification is that student loan interest should reflect the government’s borrowing costs. If the government borrows at a higher rate than it charges on student loans, it can make a loss even on loans that are repaid in full. Linking student loan interest rates to a measure such as medium-term gilt yields would avoid that problem. It would also bring student lending more into line with other state-backed lending arrangements, such as deferred payment agreements for social care.[8]

This argument has some force in theory. But in practice, it would create serious problems. A central flaw in the current system is a lack of transparency and unnecessary complexity. Tying interest rates to some measure of government borrowing costs would make both problems worse. It would also make the system less predictable, since gilt yields are often more volatile than inflation. And if interest rates reflected borrowing costs at the point loans were issued, different cohorts would face different rates depending on when they entered higher education. That would only exacerbate the existing sense of cohort unfairness.

For these reasons, we do not believe there is a strong case for charging interest rates above inflation. The fairest option is to link interest rates to CPI, which maintains the real value of the loan.

3) Was it fair for the Government to block the interest rate on student loans from going negative when the measure of index the loan was pegged to went negative? 

Although this is a rare event, in principle, yes, negative CPI should lead to lower loan balances. Whilst this is not one of the most pressing issues in the system, borrowers should be protected.

4) Should student loans be branded as loans, or as something else? Does calling a student loan a loan exacerbate the dissatisfaction with the product among its users? 

The main problem is not what the system is called. It is the system itself. While student loans may differ from conventional commercial loans, calling them loans remains the clearest and most accurate description.

Alternative labels such as a “graduate tax” or “graduate contribution” would be more misleading. They fail to capture how differently the system operates across graduates. For example, those who graduated before tuition fees do not face a “graduate tax”, nor will those who pay tuition fees upfront make “contributions”. Avoiding the term “loan” disguises the fact that poorer students take out more debt, and as a result, often make greater lifetime repayments. Framing the system more explicitly as taxation could also further blur the line between student finance and general taxation.

The argument that student loans are really a graduate tax is already outdated. With a lower repayment threshold and a 40-year loan term, Plan 5 loans will function as loans for the majority of graduates. Estimates for the number of Plan 5 graduates who will repay in full range from 55 to 80%.[9] Using different labels for different plans would only add further confusion.

That said, the system would benefit from much greater transparency. We support the introduction of an expected lifetime repayment calculation that is displayed when graduates check their loan balance on SLC. This could be based on a graduate’s past earnings and a reasonable projection of future earnings. That would help address one of the biggest problems with the current system: the psychological weight of a large outstanding balance, even when it is unlikely to ever be repaid in full. It would also encourage a more honest public conversation about the real cost of higher education.

5) What proportion of a student’s university education should be funded by the student versus being subsidised by the state? 

This goes to the heart of the debate. Unless the government addresses the balance between public and private funding, changes to loan terms will merely shift the burden within younger cohorts, rather than reduce it. In our view, higher education should return to a mixed-funding model, with costs split broadly 50/50 between the individual and the state. That is the fairest way to share the costs of higher education across generations.

Even after Plan 2 was introduced, the system was still meant to involve substantial public subsidy. In 2014, it was estimated that for every £1 lent, the state would subsidise 45p.[10] Since then, the mixed-funding model has been quietly dismantled. Direct government grants have decreased in real terms, while the RAB charge has been reduced by the tightening of loan terms. For Plan 5 loans, we estimate that the total government subsidy (direct teaching grants and RAB charge) for a median-earning graduate will be under 10%, and 30% for lower-earning graduates. DfE figures suggest the total government subsidy will be 34%, yet IFS figures estimate the total subsidy to be around 15%.[11]

A mixed-funding model is fair because higher education generates both private and public benefits. We previously estimated the total monetary return to a degree at around £501,000, with 42% accruing to the graduate and 58% to the nation.[12] Graduates typically benefit through higher lifetime earnings and better employment prospects. But the state also benefits from higher productivity, stronger tax revenues, and lower demand for some public services. There are wider gains too. Graduates are more likely to work in sectors with high social value, including teaching and social care. They also tend to have better health outcomes and lower rates of criminal offending. The cost of higher education should reflect how these benefits are shared. Broadly, that points to a roughly equal split between the individual and the state.

State funding of higher education should also be understood as an intergenerational transfer. Current generations have a duty to provide future generations with the same, if not higher, level of resources and support they themselves received. They should not burden young and future generations with debt in order to live beyond their means in the present. The 2019 reforms to the accounting treatment of student loans were a step in the right direction.[13] By recognising the write-off portion of loans as upfront public spending, they made clearer that the cost of higher education should be borne by current taxpayers, not pushed into the future.

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

6) Should the terms of a student loan be able to be changed by the government once the loan has been taken out? 

We do not believe the government should be able to change the terms of student loans in ways that leave graduates worse off after they have already taken them out. That is unfair in principle and it erodes trust between graduates and the state. In almost any other context, a lender would not be able to rewrite the terms of a loan after the agreement had been made.

The scale of these retroactive changes also matters. Our modelling shows that the cumulative changes made within Plan 2 have increased expected lifetime repayments for average earners by £14,360. The two most recent changes alone, the freeze to repayment thresholds in 2022/23 and the further freeze announced at the Autumn Budget, will cost the average Plan 2 graduate an additional £23,730 over their lifetime.

For middle and lower earning graduates, the impact of these changes has been even greater than the original shift from Plan 1 to Plan 2.[14] That should raise serious concerns about democratic accountability. The move from Plan 1 to Plan 2 triggered a national debate and mass student protests. Yet later changes to thresholds and uprating rules, despite having an even bigger impact on what many graduates will repay, received far less scrutiny until recently. The complexity of the system has allowed major increases in the cost of higher education to be introduced by stealth.

These changes are not only unfair in scale. They also undermine the original rationale of the system. Plan 2 was justified in part on the basis that lower earners would be protected by a relatively high repayment threshold. At the time, the system was often presented as a form of insurance: graduates who did not see a strong financial return from their degree would repay less. That protection has been steadily weakened. Our modelling suggests that a low earner from the final Plan 2 cohort will still make around £20,700 in lifetime repayments. Likewise, there has been increasing pressure placed on graduates at the beginning of their careers. Within the first 10 years after graduation, lower earners from the final Plan 2 cohort are expected to repay 450% more than those in the first Plan 2 cohort. Median earners are expected to repay 60% more over the same period. This period is when graduates are most likely to be financially insecure as they “find their feet”. There is also the greatest opportunity cost, as money invested in pensions or savings early will yield the highest return.

The rationale behind threshold freezes is also unjust. These changes have largely been driven by graduates’ earnings underperforming previous forecasts. To recover the revenue shortfall, the government has lowered repayment thresholds in real terms. Graduates are therefore hit twice: first by weaker wages, and then by harsher loan terms. If degrees do not deliver the returns the government expected, or there is an economy-wide downturn, it should not be graduates who suffer the consequences. The state should not simply pass the cost back to graduates after the fact.

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? 

On the whole, we do not believe prospective students are given enough clear information about the lifetime cost of student loans. Students should be provided with fair, accessible, and easy-to-understand information about how the system works before they apply. That also requires teachers and advisers to understand the current system properly. In many cases, they will have taken out loans under very different plans from the students they are advising, or have had free university education.

As noted in our response to Question 4, we believe expected lifetime repayments are a much more useful measure of the true cost of higher education than headline debt alone. Discover Uni already provides a valuable service by using LEO data to show likely earnings by course and institution.[15] The same data and interface could also be used to estimate likely lifetime repayments. That would give prospective students a far clearer picture of the costs they are taking on.

8) Should loans from the Student Loan Company be compliant with FCA rules and principles and the Consumer Duty? 

We believe that the Student Loan Company should be subject to FCA rules and the principles of Consumer Duty. If the cost of higher education has been largely privatised and universities marketised, it is only fair that students have consumer rights.

Prospective students are especially in need of consumer protection. The FCA description of consumers requiring a “high level of protection” is those:

“(1) that they typically face a weak bargaining position in their relationships with firms;

(2) that they are susceptible to cognitive and behavioural biases;

(3) that they may lack experience or expertise in relation to products offered through retail market business; and

(4) that there are frequently information asymmetries involved in retail market business.”[16]

Students clearly fit those criteria. They have little bargaining power, limited experience of complex financial products, and often make decisions under significant uncertainty. That makes the case for stronger protections particularly compelling.

9) Does changing the terms of a government loan contract once it has been entered into erode trust in Government? 

Our work at IF has highlighted the growing strain on the social contract between generations. High housing costs, poor access to mental health support, an insecure labour market, and rising student debt have all contributed to growing disillusionment and apathy among young people.[17]

Student finance is only one part of that wider picture. But because student loans are a direct contract between the individual and the state, retroactive changes are especially damaging to trust in government. It is often difficult to identify a single cause of problems, such as high house prices or weak wage growth. By contrast, the pressures created by student finance are the direct result of government policy choices. When those choices are made retroactively, and to the detriment of graduates, they send a clear message to young people that the state cannot be trusted to keep to its side of the bargain.

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? 

It is unlikely that retroactive changes will affect the take-up of student finance. Plan 2 loan terms have been changed frequently since 2016, yet loan take-up appears to be unaffected. Given that tuition fees are set to rise, as well as general living costs, it will remain a small minority of families that will be able to pay for fees upfront. Given that the true cost of loans is not realised until decades into the future, as well as students’ weak bargaining position, loan uptake is an inadequate metric of fairness.

11) Are there examples of the government unilaterally changing the terms and conditions of finance provided to companies or pensioners or other groups in the economy? 

To our knowledge, there are no equivalent examples. This is one of the reasons we believe these changes are intergenerationally unfair. The same principles should apply across age groups.

12) Should the incomes of higher-earning graduates be used to subsidise the loans of lower-earning graduates? 

The in-built cross-subsidy within the student loan system is often defended on the grounds of progressivity. The argument is that those who go on to earn more and repay their loan in full should help cover the cost for those who do not. In practice, this means some graduates repay more than they originally borrowed in real terms. While this may look progressive in a narrow sense, we do not believe it is progressive in any meaningful or fair sense. If lower-earning graduates are to be subsidized, that subsidy should come from the state, not from within the same cohort.

This is because student loans are a poor tool of redistribution. The burden does not fall on the wealthiest, nor even necessarily on the highest earners. Some graduates are outside the system altogether. Our previous research found that 10% of university students do not take out student finance, instead paying their fees upfront.[18] Regardless of their later earnings, wealthier students make no contribution to the subsidy. Meanwhile, the very highest earners are often able to pay down their loans before much interest accumulates. There are also increasing reports of high-earning graduates taking out cheaper private loans to clear their student debt early. While there is little direct data on this, voluntary early repayments have increased.

In reality, the main burden falls on graduates with relatively high earnings who are not wealthy enough to escape the system. They repay in full, but not quickly enough to avoid years of interest accumulation. In effect, they carry much of the cross-subsidy. Our modelling suggests that a typical upper-quartile earner from the final Plan 2 cohort will repay £24,850 more, in 2025 prices, than they originally borrowed.

In particular, the system places the greatest burden on socially mobile graduates from poorer backgrounds who took out full maintenance loans. They start with larger debts, accrue more interest, and need much higher earnings just to stop their balance rising. This became even more pronounced after the abolition of maintenance grants in 2016. The gap between minimum and maximum maintenance support rose from £6,000 to £13,500.[19] We estimate that, among high earners in Plan 2, those who took out the maximum loan will repay £29,100 more over their lifetime than those who took out the minimum. Yet the original gap in loan outlay was only £13,800.

There is also a deeper problem. Framing this as progressivity within a single graduate cohort ignores the wider inequalities between generations. Younger generations already face weaker living standards, lower disposable incomes, and much greater barriers to building wealth than those who came before them. Our research shows that under-30s now spend 70% of their expenditure on essentials, compared with 56% for the over-65s.[20] For under-30s, that is a 16 percentage point increase over the past two decades. Even under-30s in the highest disposable income quintile spend a greater share on essentials than over-65s in the lowest quintile. Pensioners’ disposable income after housing costs is now broadly level with that of the working-age population.[21] At the same time, it has become much harder for younger people to accumulate wealth. Rising wealth-to-income ratios have entrenched inequality and weakened social mobility. It now takes 16 years of typical earnings to move from median to top-tier wealth, up from 10 years in 2008.[22] Homeownership rates among the young have also roughly halved since the 1990s.

A fair and sustainable higher education system does require subsidy. Graduates with poorer outcomes should not be expected to bear the full cost of their loans. But there is little justification for making that subsidy come from within the same generation, especially when even higher-earning young graduates are struggling to reach milestones such as homeownership, family formation, and saving for retirement. In practice, the cross-subsidy is borne disproportionately by socially mobile graduates, at precisely the moment when social mobility has become harder and inheritance has become more important relative to earnings. That is why the subsidy should come from the state through general taxation. Public support for higher education should be understood as part of the wider duty of current and older generations to invest in the young and the future.

Fiscal policy 

13) How does the student loan system interact with the taxation system, including marginal rates? 

For most Plan 2 graduates, student loan repayments operate like an additional time-limited income tax of 9% above the repayment threshold, which is currently £29,385. In some respects, they are treated less favourably than income tax, since repayments are deducted from gross pay rather than income net of pension contributions.

This pushes up marginal tax rates significantly. A graduate paying the basic rate of income tax faces a marginal rate of 37% once student loan repayments are included. A higher-rate taxpayer faces a marginal rate of 51%. With the higher-rate threshold frozen at £50,270 until 2031, more graduates will be pulled into that band over time. We estimate that by 2035/36, around half of all Plan 2 graduates will be higher-rate taxpayers.[23] 

High marginal tax rates are not inherently unfair. If the government openly chooses to raise taxes to fund better public services, that would be a legitimate political decision. The deeper unfairness lies elsewhere. Young graduates face a much heavier tax burden than many older people on the same income. For example, someone above State Pension age with an income of £30,000 faces a marginal tax rate of 20%. A young graduate on the same income faces a rate of 37%. That disparity is hard to justify.

Recent policy decisions have made this worse. The freezing of thresholds for student loan repayments, income tax, and National Insurance means young graduates have been hit repeatedly by fiscal drag. They face both higher tax bills and higher loan repayments as their earnings rise. This is not fully captured by marginal tax rates alone. It is visible in effective tax rates, the share of total earnings paid in tax and student loan repayments. We estimate that a median-earning Plan 1 graduate who entered university in 2008/09 will pay around 18% of their earnings over the loan term in tax and student loan repayments. For a median-earning Plan 2 graduate who entered in 2022/23, the figure rises to 23%. That is despite the cut in the main rate of National Insurance from 12% to 8% in 2024.

In combination with fiscal drag, harsher student loan terms have increased the tax burden on young graduates by stealth. Higher marginal and effective tax rates are not necessarily objectionable in themselves. What is objectionable is that this burden falls so heavily on one age group, and that it has been increased with so little transparency.

14) Do student loans currently deliver equitable shares of burdens and benefits between generations? 

No. Throughout this submission, we have set out why the current student loan system fails to distribute burdens and benefits fairly between generations. Older generations, whose higher education was largely, and often fully, subsidised by the state, are not making an equivalent contribution in return. If the government believes it is in the national interest for a large share of the population to go to university, the cost should not be loaded so heavily onto the young. Nor should student loans be used as a backdoor for raising revenue.

Student loans also reflect a wider pattern. Over recent decades, younger generations have been asked to shoulder heavier burdens while public resources have become increasingly skewed towards older age groups. At the same time, it has become harder for younger people to build wealth, reach traditional life milestones, and achieve financial security. The student loan system has added to those pressures. Greater public investment in higher education would not solve every dimension of intergenerational unfairness. But it would be an important step towards a fairer balance of burdens and benefits between generations.

Contact information

We would welcome the opportunity to provide oral evidence to the Committee.

April 2026