SLTG0226
Introduction
- Prospect is a trade union representing over 160,000 members across the public and private sectors. They work in a range of industries, such as aviation, defence, energy and media. Due to the nature of many of the roles they perform, a significant proportion of Prospect members hold undergraduate degrees (and many also hold postgraduate degrees).
- The patchwork of different student loan regimes that apply in the different nations of the UK, and the complex interaction between their main terms, makes it difficult for many stakeholders to understand how the cost of higher education is shared between groups (eg taxpayers and students) and within groups (eg between graduates by different levels of earnings).
- The complexity of the system potentially means that unfairness receives less challenge than it would in simpler and more transparent systems. The same complexity may also increase the attractiveness to Chancellors of changing elements of the system to increase yield to help meet fiscal targets. But, whatever the reason for different features of the system, or for decisions like the one in Budget 2025 to freeze the repayment and interest thresholds for Plan 2 loans for three years, there is growing unease at how the system works and younger graduates are becoming increasingly vocal about the burden on them.
- These systems need the consent of graduates and wider society to be effective and remain stable. The growing dissatisfaction with systems that are considered unfair, and with specific changes that make them more burdensome, undermine confidence in policy in this area, and even in the wider tax system. The Committee’s inquiry is a welcome and timely opportunity to listen to the legitimate concerns of graduates and feed into the government’s reported review of the system[1].
- Prospect is submitting evidence to this inquiry on behalf of members who, as well as completing the Committee’s survey, also want their trade union to represent their collective views on these issues. Prospect does not currently have policies on specific changes to the system to improve outcomes, but this submission reflects our position that the current arrangements, and recent changes, are an unfair burden on graduates.
- There are different options for easing the burden of student loan repayments on recent graduates. Each have advantages and disadvantages and would affect different groups in different ways. Prospect members’ general preference is for priority to be given to reversing retrospective changes that they believe unfairly added to their burden, they most commonly referenced the Budget 2025 decision to freeze the repayment threshold for Plan 2 loans for three years until April 2030.
Prospect’s Responses to the Questions in the Call for Evidence
- Please see below for Prospect’s responses to the questions included in the call for evidence.
1) Should a student loan incur interest? 1b) Should the interest on a student loan be dependent on income? 1c) Should the interest on a student loan be fixed to RPI, CPI, or another measure?
- Yes, a student loan should incur interest. Otherwise, the amount repaid would be significantly less than the amount borrowed in real terms (which would make the system much more expensive for taxpayers and could even be exploited by those with the resources to do so). A system without interest would greatly change the way higher education is funded in opaque and potentially very unfair ways.
- There are different ways that the interest rate on student loans could be set, with advantages and disadvantages to each. But it is important to view these different approaches in the wider context of the role the interest rate plays in the system and on the amount that different graduates ultimately repay.
- Much of the debate about the system involves criticism of the high rate of interest and the way that rate is set. But the interest rate does not actually affect the amount repaid by a large proportion of graduates. Reducing the interest rate
will tend to disproportionately benefit the highest earning graduates and have no effect at all on the amount repaid by many other graduates with Plan 2 loans.
- There is an argument that it is wrong in principle to charge graduates an interest rate on loans that is above the rate of inflation (see question 2). But there should not be any argument over the appropriate inflation index to use as a baseline for setting the interest rate. It should not be necessary to repeat the criticisms of the Retail Prices Index in this submission, as they are well known to the Committee and others. It is unacceptable that this measure continues to be used as a basis for calculating the outstanding balance of student loans. At the very least, an equivalent interest rate set by reference to the Consumer Prices Index should be adopted, this would greatly increase the transparency of the system by clarifying what the real interest rate is.
- An interest rate that is dependent on income is not an obvious feature for a system of student loans to have. However, it has the potential for making the overall system less unfair and is not necessarily completely out of place.
2) Are interest rates above the rate of inflation on a student loan fair?
- Interest rates above the rate of inflation are not necessarily unfair. There are theoretical arguments that could justify an interest rate above inflation in certain circumstances (eg to reflect the underlying cost of borrowing, to help cover the cost of non-repayment). But any assessment of the fairness of a particular rate of interest needs to consider the practical impact on the overall funding of higher education and on the cost of the system to different groups of graduates.
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?
- One of the most consistent themes of feedback about the student loan system from Prospect members has been a frustration that the original terms of the loans they agreed to have not been honoured by subsequent governments. Blocking the interest rate from going negative was not typically mentioned, but it is another example of the government imposing retrospective changes that disadvantage graduates.
- If there are practical benefits to implementing a floor on the interest rate for student loans, then it should be on a reciprocal basis with a cap that prevents the rate rising to as much as 8% again.
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 difficulty is that the system operates as student loans for some graduates and operates as a graduate tax for others. No one description can adequately cover how all users experience the system.
- Those who experience the system as a graduate tax often mistakenly think that they are particularly disadvantaged when the interest rate is exceptionally high, even though this makes no difference to their overall repayments.
- However, a more thorough explanation of how the system really works from their point of view may not increase satisfaction levels if it clarifies what their repayment percentage of lifetime earnings is (usually higher than those for whom it is a loan).
5) What proportion of a student’s university education should be funded by the student versus being subsidised by the state?
- This is beyond the scope of the issues we consulted Prospect members about, so we will not answer this question directly. However, it is important that whatever settlement is agreed, and signed up to by individual students, should be honoured and not changed retrospectively to rebalance the cost more to students many years later (by, for example, freezing the repayment threshold for three years).
6) Should the terms of a student loan be able to be changed by government once the loan has been taken out?
- As mentioned above, Prospect members who shared their views about the system were most exercised by retrospective changes that resulted in higher costs. Aspects of the student loan system should not be treated as levers that Chancellors can pull at fiscal events to make their overall plans fit into their fiscal targets.
- While the system may operate as a graduate tax more than a student loan for most, it is still an implied contract that individuals entered with the government with reasonable expectations that it would be honoured. Graduates are unable to choose not to pay what they owe, government should not be able to make them pay more.
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?
- It is not realistic to expect that prospective students will be able to make fully informed decisions in relation to important choices about higher education. Decisions about whether to undertake higher education, where to study, what to study and how to pay for it are all subject to a significant degree of asymmetric information.
- Prospective students do not have complete information about the educational quality provided by different universities they may be considering studying at. They rely on regulators and transparency requirements to help them make decisions they would otherwise have to take on faith.
- Similarly, prospective students do not know what impact higher education will have on their future lifetime earnings and cannot reasonably be expected to understand the impact that taking out student loans will have on their future finances.
- While it is important that sufficient information is given in a clear and fair form, it is even more important, given the asymmetry of information involved, that there is a clear commitment to treating students fairly and to avoid retrospective changes that rebalance the cost of higher education onto them.
8) Should loans from the Student Loan Company be compliant with FCA rules and principles and the Consumer Duty?
- No. These are not the same as loans provided by banks or other institutions and they do not have to be treated as such (for many they are effectively a graduate tax, rather than a student loan, and it would not make sense to apply FCA rules in those situations).
- As noted above, it is very important for governments to commit to treating students fairly in relation to the terms of student loans (including avoiding unfair retrospective changes). But this can be done without formally applying the FCA rulebook to the Student Loan Company.
9) Does changing the terms of a government loan contract once it has been entered into erode trust in Government?
- Yes. Particularly changes, like the freezing of the repayment threshold for three years, that appear to be a naked tax grab to help the Chancellor meet her fiscal targets.
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?
- Possibly at the margins. As noted above, prospective students are subject to a great degree of asymmetrical information. They cannot reasonably be expected to foresee whether the terms of any student loans they take out would be honoured. The more robust the commitment to treating them fairly is, the more reliable the information they base decisions on will be. It there is not a strong commitment to treating students fairly, or if there is recent history of unfair retrospective changes, then this could influence prospective students who were not sure about undertaking higher education.
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?
- Yes, but that does not seem particularly relevant, as it is not a good excuse to retrospectively change the repayment terms of student loans for graduates. (An example, though in reverse, would be increasing the added pension that retired members of public service pension schemes bought, on the basis of increases in payment being linked to the Retail Prices Index, in line with the Consumer Prices Index instead.)
12) Should the incomes of higher-earning graduates be used to subsidise the loans of lower-earning graduates?
- The loans of lower-earning graduates must be subsidised because they do not earn enough to repay them in full. (They also do not command enough of an earnings premium to suggest the cost of higher education represented good value to them.)
- There is a reasonable argument that those who command the highest earnings premium because of higher education are well placed to bear some of the cost of subsidising the loans of lower earning graduates.
- There is potentially more space for the very highest earners to bear more of this cost, given that they currently repay the lowest percentage of lifetimes earnings of all.
13) How does the student loan system interact with the taxation system, including marginal rates?
- The repayment rate of 9% on earnings above the repayment threshold increases the effective marginal tax rate of graduates.
- While this can commonly increase marginal tax rates to 51% for many graduates, in some circumstances it can lead to much higher marginal tax rates.
- When the impact of the repayment rate is combined with the effect of the High Income Child Benefit Charge, the effective marginal tax rate can exceed 70%. For example, a parent with two children earning between £60,000 and £80,000 faces an effective marginal tax rate of 72%.
- There are also very high marginal tax rates associated with the withdrawal of the personal allowance. This results in a marginal income tax rate of 60% for those earnings a little over £100,000, which is a total effective marginal rate of 71% after allowing for National Insurance and student loan repayments.
- The impact for taxpayers earning at or around £100,000 year is exacerbated by the childcare cliff edge (ie losing eligibility for 30 hours free childcare and tax-free childcare). The combined impact of all deductions and this loss of eligibility can result in marginal tax rates that are effectively over 100% (ie employees can be worse off after a pay rise).
- The problems above are based in the existing tax system and the existing system for childcare support. But they are exacerbated by the high repayment rate faced by graduates with student loan terms. Effective marginal tax rates of 50%+ and 70%+ will greatly affect decisions by taxpayers about how much they should work and about tax avoidance activity (such salary sacrifice or operating through a personal services company).
14) Do student loans currently deliver equitable shares of burdens and benefits between generations?
- Prospect does not have the resources to model the share of the cost of higher education between generations. But it does not require sophisticated modelling to understand that those on Plan 2 loans are generally bearing a far higher share of the cost of their own higher education than previous generations did.
April 2026