How Burnham could tackle student loan debt – and how much graduates could save

Andy Burnham’s Government could reform the student loan system as part of plans to reduce living costs for graduates.

Although details have yet to be announced, the new Prime Minister’s team gives an indication of the policy options being considered and how much money graduates could save.

Raising the repayment threshold

Plans to increase the salary threshold – the point at which repayments begin – for students with Plan 2 loans are being explored by Burnham, The i Paper previously revealed.

At the 2025 Budget, Sir Keir Starmer’s government said the repayment threshold would increase to £29,385 from April 2026 and then be frozen at that level until 2030.

These loans, taken out by students who began undergraduate courses in England between 2012 and 2023, have left some graduates with balances that have grown beyond the amount originally borrowed, as interest has accrued faster than repayments have reduced the debt.

Graduates currently make loan repayments worth 9 per cent of what they earn above the threshold.

Reversing the freeze would save graduates an average of £260 a year, according to the Institute for Fiscal Studies (IFS).

Those earning £30,000 would save £55 a year by 2029-30, and those with incomes of at least £40,000 would save £170, according to the Institute for Public Policy Research (IPPR), another think-tank.

The measure would cost £400m in the medium term and increase public borrowing by £5.6bn, according to the Office for Budget Responsibility and IFS.

Replacing student loans with a graduate tax

In Burnham’s 2015 Labour leadership bid, he pledged to replace tuition fees with a graduate tax to lift the “millstone of debt” weighing down young people as they start their careers.

The tax would have meant universities being funded via the state, with students paying a small progressive income tax surcharge only once they hit a comfortable earnings threshold.

Burnham’s new chief of staff, James Purnell, was vice chancellor at the University of the Arts London (UAL), and has advocated for similar student loan reforms, suggesting in 2024 that they could be scrapped and replaced with a graduate tax.

In 2022, modelling commissioned by UAL, while Purnell was vice chancellor, proposed that a graduate tax of 3 per cent could be payable on earnings between £12,570 and £50,270 and 5.5 per cent above £50,270.

The tax would be levied until retirement and would not cost the Treasury anything to implement. It was designed to be more progressive, meaning those on lower incomes pay less and their savings are subsidised by those on higher incomes.

For someone earning the average salary of £39,039, the annual payments would be £66 a month, or £794 a year, according to estimates by The i Paper.

Under the current system, someone on this salary with a Plan 2 loan pays only a little more – £68 a month or £815 a year.

On the newer Plan 5 loan, which has a repayment threshold of £25,000, the current repayments in the average salary are substantially higher, at £105 a month or £1,264 a year.

Stepped repayment system

An easier option that Purnell said would save the Treasury £841m per cohort would be to introduce a stepped repayment system.

Instead of the current repayment rate of 9 per cent of earnings above the income threshold, graduates would repay 3 per cent of their earnings between £12,570 and £27,570, 6 per cent between £27,571 and £57,570, and 3 per cent on earnings of £57,571 or more.

Interest rates on loans would stay at inflation plus 3 per cent while studying, but after graduation the amount added to inflation would start at 0 per cent for earnings below £27,571, be between 0 and 3 per cent for those earning between £27,571 and £57,570, and rise to 3 per cent for those earning above £57,570.

The repayment period would take place over 30 years, rather than the current 40 years.

Someone earning an average salary of £39,039 would make repayments of £95 a month, or £1,138 a year, according to estimates by The i Paper.

This approach was designed to save the Treasury money and redistribute costs so the poorest graduates pay less than the wealthiest.

Purnell said the changes could allow for maintenance grants to be fully reinstated.

Reducing the interest rate on student loans

Lucy Powell, who was appointed Education Secretary this week, said in February that student loan repayments feel “endless and unfair”.

Speaking to LBC, she criticised the interest rate on Plan 2 loans, which is set at the Retail Prices Index (RPI) – a measure of inflation – plus 3 per cent.

“The plus 3 per cent, that is particularly egregious, in my humble opinion,” she said, indicating that she could push for the amount of interest to change.

The interest rate on Plan 5 loans, which are more recent and were issued to those who began their studies from August 2023, is set at RPI.

If the Government reduces the interest rate on Plan 2 student loans to RPI, as proposed by the Conservatives, it would reduce average lifetime repayments among those who started courses in 2022-23 by around £11,000, the IFS estimated.

The 30 per cent of graduates with the highest lifetime earnings would save more than £20,000.

The change would reduce overall loan balances and make it easier for people to pay them off in full.

However, the change would not make an immediate difference to most graduates’ monthly repayments because these depend on earnings – and those who never earn enough to repay their loans in full before they are written off by the government would not benefit.

If this change applied only to the last cohort who took out these loans – those who started university in the 2022-23 academic year – the reform could cost the taxpayer around £4bn in today’s prices.

However, one of Burnham’s economic advisers, Carys Roberts, is likely to oppose the idea.

While Roberts was executive director of the IPPR, the think-tank argued against reducing interest rates on student loans, saying it would only benefit higher earners and the gains would only materialise after many years.

Reducing the repayment rate

Under her leadership, the IPPR proposed reducing the repayment rate from 9 per cent to 4.5 per cent, which would cost £5.8bn by 2026-27.

Someone earning £40,000 would save £519 a year, while someone earning £100,000 would benefit by six times as much in cash terms with a boost of £3,219.

However, the think-tank argued that the cut could be more targeted to lower earners by halving the repayment rate to 4.5 per cent up to £50,000, but keeping it at 9 per cent for earnings above that level.

This would cap the maximum cash benefit at £969 a year for those earning £50,000 or more.