Are student loans a stealth tax?

Many readers of this Blog will either have a student loan themselves or have an employee who has one, but there is much confusion on the subject. So today I will attempt to give readers a simple guide on the subject, as well as highlighting some appalling errors by the Student Loan Company, aided and abetted by HM Government’s attack dog, HMRC. But first a brief guide on the repayment rules.

Student Loans

In essence, a student loan is a specialised type of finance to help students pay for higher education costs, including tuition, books, and living expenses. Unlike standard loans, they feature flexible, income-based repayment schedules and lower interest rates, with any unpaid loan balances written off on death or after between 25 and 40 years, dependant upon the student loan type.

There are three main types of Student loans, with repayments normally starting once your earnings exceed £26,900, with the amount payable being 9% of all earnings over this figure, plus interest. However, the rules differ dependant upon what plan you’re on.

• PLAN 1 – This type covers over 2.5m English and Welsh students who started uni before August 2012, with the interest rate being the lower of either the BofE base rate, plus 1%; or the rate of inflation, based on the Retail Prices Index (RPI) measure from the previous March. Unpaid balances are written off after 25 years
  
  
• PLAN 2 – This type covers students who started uni in or after 2012, the headline student loan interest rate is 6.2% and rises in line with RPI but will be capped at 6% from 1 September 2026. Repayments currently start when your income is above £29,385 pa and you pay 9% of everything you earn above the threshold. Unpaid balances are written off after 30 years
  
  
• PLAN 3 – This refers to a Postgraduate Master’s or Doctoral loan, with loan repayments starting at income over £21,000 pa and you repay 6% of earnings over that annual threshold. Unpaid balances are written off after 40 years
  

If your income drops below the threshold, repayments stop, which means the loan can sit there for years, with interest continuing to compound, year on year. This is especially unfair to women who take a career break to have a family.

What has the government done?

1. Backtracking As stated above, currently students in England who started university from 2012 will pay 9% of everything earned above £21,000 a year once they graduate, with HMGOV promising that from April 2017 that this repayment threshold would be raised each year in line with average earnings. However, they have now backtracked on the promise given to students, effectively hiking costs retrospectively.
   
   
2. Goalposts have been moved (for some!) Earlier this year HM Gov announced that there would be a cap on interest rates and proudly boasted that they were also increasing the repayment threshold for Plan 2 loans to £29,385 wef 6th April 2026. However, what was not in the press release, was that the new threshold would not be backdated, leaving many to continue making repayments at a much lower threshold.
   
   
3. Frozen tax thresholds The real pressure point is the frozen repayment threshold, which is pulling more people into repayments earlier. In 2024 our current government promised to raise the repayment threshold, partly to reflect frozen tax thresholds, but this was conspicuously absent from their announcement earlier this year, when they heralded the 6% cap in the interest rate.

Student Loan Company (SLC) cock-ups

Press reports of SLC errors are constant, with many made worse by their partners in crime HMRC, who are not only regularly making coding and tax allocation errors, but often make matters worse by failing to adequately liaise with the SLC. These avoidable errors, in most cases, result in tax being overpaid.

Recently, the SLC admitted that over 70,000 Plan 2 borrowers were affected by technical and HMRC reporting errors causing incorrect interest calculations in the 2024/2025 tax year, with over 60% of the cases resulting in borrowers being overcharged interest, many by significant amounts.

Another example of an SLC cock-up came to light earlier this year when nine universities began legal action against the government loan company in a row over nearly 25,000 students being sent letters saying they were given maintenance loans in error and demanding immediately repayment pf the money.

The students affected were all on weekend courses, which were suddenly and arbitrarily reclassified as distance learning. To make matters worse, the repayments have been demanded on an accelerated time frame. The legal action against the government challenges that decision on the grounds that the loans were granted by the SLC based on the old interpretation of the rules, with repayment of them being demanded because of a change in the rules which is being applied retrospectively.

I could give a lot more examples of often arbitrary demands by the SLC for repayment of loans, which in most cases, were not down to errors by the students, with the most common reason being errors by HMRC

Accountant’s view

Without any action to raise the repayment threshold, graduates will continue to feel the strain, not only because of headline interest rates, but also because student loan repayments sit alongside some of the toughest housing and cost of living conditions seen in a generation.

This has been made significantly worse because, despite pre-election promises, Rachel Reeves and Kier Starmer have abandoned their pledge to raise the repayment threshold in line with inflation, once they realised the cost. However, with a new Prime Minister and Chancellor set to take over in a week or two things might change, but I wouldn’t get your hopes up!