Student loan model under pressure - is it still sustainable? - 26th February 2026

The student loan debate in the UK has intensified this week, with government ministers facing mounting pressure to reform repayment rules amid rising graduate anger over interest rates and frozen thresholds. Here we roundup the latest developments: 

What’s driving the current debate? 

1. Growing pressure to reform repayment thresholds: 

• The government is under increasing scrutiny over frozen repayment thresholds in England, which are pulling more workers into higher repayment brackets. Plan 2 loans threshold of £29,385 will be frozen for 3 years starting April 2027. Plan 5 loans threshold will remain at £25,000 until April 2027, when it is planned to increase annually in line with RPI inflation.

• Labour faces internal tensions, with MPs warning that the issue could become “the next welfare scandal,” signalling potential political fallout. 

• Because repayments are calculated at 9% of earnings above the threshold, a freeze effectively increases repayments over time as wages rise. Critics argue this amounts to a “stealth tax” on graduates. 

2. Clash over interest rates on Plan 2 loans: 

• Concerns that Plan 2 loans (2012–2023) “increasingly feel like a scam” due to interest rates tied to RPI + up to 3%, depending on income. 

• Around 5.8 million borrowers hold these loans, making any policy change highly significant. 

3. Treasury considering major adjustments: 

• Reports suggest officials are examining options ranging from adjustments to interest calculations to longer-term structural reform, though no formal proposals have been announced 

• Talks come amid warnings from university leaders about the longterm sustainability of the current system. 

Parliamentary review underway 

In the House of Lords and Commons, ministers have defended the framework as progressive, arguing that repayments are income-contingent and that lower earners are protected. However, cross-party calls for a broader review of higher education funding continue to gather momentum. 

Why this matters 

• Graduates: Many face rising repayment burdens due to frozen thresholds and high interest rates. 

• Government: Risks political backlash if reforms are delayed. 

• Universities: Warn that the system may become unsustainable without structural changes.