Martin Lewis: On a Plan 2 Student Loan? Beware! The Government is freezing the repayment threshold. Should you overpay now (spoiler: for some yes, many no)?

Money Saving Expert

26 January 2026

If you’re an English or Welsh student who started university in the academic years 2012/13 to 2022/23 (and Welsh students since then too), you’ll hopefully know you’re on what’s called a ‘Plan 2’ Student Loan. If so, I doubt you like it much, as it’s the only undergraduate Student Loan repayment plan designed to mainly charge interest above RPI inflation.

And right now, many are understandably angry, as they look at their statements and see their repayments aren’t making any headway. Some are calling it a ‘stealth tax’ – which it definitely feels like, though how stealthy it is is an open question.

However, change is afoot, and not in a good way for graduates. The repayment threshold will be frozen from next year. This certainly feels like a stealth rise. And for those politically minded who feel strongly I’d see this as the start point to discuss with/write to your MP. Yet Student Loans are a complex beast, so I wanted to bash out a blog (which has grown as I wrote it), to talk you through the lay of the land…

1. What’s changed?
2. Warning: Freezing of the repayment threshold
3. Millions can get £100s overpayments back
4. Time to voluntarily overpay Plan 2 to reduce interest? (for some yes, many no)
- Interest added, isn’t interest paid
- AI overpayment calc
5. How does Plan 2 compare to new Plan 5?

NB. Even after all these years we still, tragically, educate many of our youth into what we call a debt, but never educate them about debt. All schools & sixth forms should teach this (hopefully the curriculum change coming will help), and Universities should be made to teach it to UK students in their first and last week!

1. What's changed to make Plan 2 loans worse?

The honest answer is everything and almost nothing. The key fact that dictates what you pay each month is how much you earn. It’s set at 9% above a repayment threshold (currently £28,470) so it’s your earnings that dictate how much it costs you each month.

And while the key terms of the loan themselves mainly haven’t changed since Plan 2’s 2012 introduction, many adjacent issues have, making repayments harder…

The big one! Freezing of the tax thresholds. The main income tax thresholds haven’t moved since 2021, while at the same time we’ve had high inflation, which has pushed up earnings. That means people on the same equivalent incomes pay a greater chunk of it in tax, as more of their earnings are above the thresholds. It also means some graduate earners are reaching the higher 40% tax threshold at an earlier point in their careers than they would’ve otherwise.

This is deliberate ‘fiscal drag’, the stealthy way governments are increasing the tax-take while keeping the electoral promise of ‘not increasing income tax rates’. And, with Student Loans effectively acting as an additional marginal tax, it means that 9% extra above the £28,470/yr threshold has a harder impact.
The cost of living has increased. High inflation by definition means the cost of living has increased. So, incomes are squeezed more, making Student Loan repayments a bigger hit.
Plan 2 interest terms haven’t changed, but the rates have. From the start when Plan 2 loans were introduced, I argued against above inflation rates of interest being added, based on a principled belief that we shouldn’t charge people for the financing of the funding of their education, and the psychological impact, just as much as the cost.

Plan 2 loan interest is set at RPI inflation + 3% while studying. Afterwards it moves to tiered rates starting at RPI, rising up to RPI + 3% depending on what you earn. The rate used is usually the prior March’s RPI before the September academic year. As examples...

- In 2012/13, that meant a RPI rate of 3.6%, so the interest was 3.6% to 6.6%
- In 2015/16, it was at its lowest, RPI 0.9%, so the interest was 0.9% to 3.9%
- In 2020/21, it was at an RPI 2.6%, so the interest was 2.6% to 5.6%

When inflation surged in 2022, RPI rose to over 13%, but secondary legislation was introduced to put an emergency cap on if the Plan 2 interest rate went higher than ‘average commercial interest rates’, so…

- From late 2022 until the end of Aug 2024, the Cap applied and varied over time typically in the 6% to 8%. Yet crucially this applied to everyone, regardless of income, so while it wasn’t a great jump for the highest earnings, it was for everyone else. After that we returned to the original formula…
- For the 2025/26 academic year, the RPI rate is 3.2%, so the interest is 3.2% to 6.2%, close to the rate of the first year of Plan 2 loans.

Hopefully now, the years of super-high inflation are ending, and the rate will lower (a hope not a prediction), but that doesn’t mean the amounts already added will go away.
Another ‘stealth change’ is at the level of earnings Plan 2 holders start paying the highest interest. This is arguably a real effective change to terms that is having an impact, and I feel it has flown under the radar. Remember, the interest charged after Uni is RPI up to RPI + 3% depending on earnings.

Tax year
RPI interest up to max...
Hits RPI + 3% interest at...
2012/13
£21,000/yr
£41,000/yr
2018/19
£25,000/yr
£45,000/yr
2026/27
£29,385/yr
£52,885/yr

The change each year is at the discretion of the Secretary of State for education, and unsurprisingly it hasn’t kept pace with inflation. If it had the upper threshold would be far in excess of £60,000 earnings now, so fewer people would be on it.
The employment and earnings value of a degree. This is outside my area, but it’d be amiss not to mention it. For many, a degree will have been substantially beneficial to their earnings: figures of roughly 20% to 30% higher pay over a lifetime are often cited (and degrees bring cultural, social and broader worldview benefits too). Research suggests this premium often becomes more pronounced from around age 30, so hopefully many on Plan 2 will be moving into that phase.

Yet ‘for many’ is not for all. There’s no doubt the massification of higher education has led to some erosion in the earnings premium for some graduates. And of course, the potential impact of AI on professional and white-collar jobs may mean there's a fear of pressure on graduate earnings in future.

Tax year	RPI interest up to max...	Hits RPI + 3% interest at...
2012/13	£21,000/yr	£41,000/yr
2018/19	£25,000/yr	£45,000/yr
2026/27	£29,385/yr	£52,885/yr

2. Warning: A stealth increase... freezing the repayment threshold from 2027

Those on Plan 2 loans currently repay 9% of everything earned above £28,470/yr, which will rise to £29,385/yr in April this year. Yet in the recent Autumn 2025 budget, the Chancellor said that after, from April 2027, it will be frozen for those from England (the Welsh Government has said it is in discussions with Westminster about the implications for Welsh borrowers).

This means the expected threshold changes in April 2027, 28, and 29 won't happen, it'll remain at £29,385/yr. This is the government moving to use ‘fiscal drag’ on Plan 2 Student Loans too. It means assuming prices and average earnings rise, the threshold won’t, so a bigger proportion of Plan 2 income will go towards repaying the Student Loan. Coupled with the freeze in main tax rates planned until April 2031 too, this is double drag.

Let me explain the Student Loan concept with some numbers (picked to make it simple to understand rather than to predict the exact impact)…

- Now: Earn £28,400, that’s below the £28,470 threshold, so you repay nothing.
- Apr 26: pay rises to £29,300, below the new £29,385 threshold, so repay nothing.
- Apr 27: pay rises to £30,200, above the frozen £29,385 threshold, repay £73/yr
- Apr 28: pay rises to £31,100, above the £29,385 threshold, repay £154/yr
- Apr 29: pay rises to £32,000, above the £29,385 threshold, repay £235/yr
- Apr 30: pay rises to £32,900, above the £29,385 threshold, repay £316/yr

This scale of increase doesn’t just impact those near the threshold, the same would be felt by all above it too. And for those whose earnings rise quicker, whether due to promotion or inflation would see an even bigger hit.

This hits all, and is unfair to all. Yet it's most unfair to those who started Uni between 2012 to 2015, who the then Government had promised to increase the threshold with average earnings. Back in 2015, I threatened the govt with judicial review over its then freeze of the threshold at £21,000. Thankfully the campaigning, including this 100,000 signed petition, worked and it eventually relented, and even jumped the threshold up to £25,000.

That meant it wasn’t necessary to go to Court. Thankfully, as I can now tell you, the private advice I had commissioned from lawyers at the time, said I didn’t really have much of a legal chance. I make that point now, to show that any change or reverse the coming planned freeze likely needs a political will not a legal one.

Who does this freeze hit hardest? Those who earn from just above the threshold up to mid-level graduate salaries. That’s because they will have to pay more each year, but won’t get any gain from it, as they’ll still just pay 9% above the threshold for the 30 years until the Plan 2 loan is wiped.

Higher earners will repay more each year too, but then the higher repayments at least mean they will clear what they owe earlier, so pay less total interest.

It is terrible practice of all governments, to fail to be upfront about what Student Loan terms are seen as ‘fixed’ and what are ‘variable’. No consumer lender would be allowed to do this. I’ve campaigned before that these terms should be regulated, and Student Loans should have to follow the Financial Regulators rules, but to no avail.

Interestingly the backbench, relative newcomer opposition MP who put forward an amendment in parliament to support that campaign, was our now Secretary of State for Health Wes Streeting see Guardian: Student Loans fight over disgraceful freeze in income. I wonder whether he’d still support it now (never mind ditching the freeze) – I hope so, I’ll ask him if I get the chance.

3. Millions on Plan 2 have unintentionally overpaid, and can get £100s back

The latest Student Loans Company (SLC) figures show there were more than a million overpayments in the 2024/25 tax year and, from past MSE ‘Freedom of Information’ requests, we estimate there are at least 5 million who have overpaid. It’s easy to get your money back.

As Caroline emailed:

"I was amazed to get a £949 refund from the Student Loans Company, as I assumed I had paid the correct amount over the years. It was a very easy process, and the refund went straight into my bank account. Thanks for highlighting."

There are four main overpayments reasons…

The Big One: While Student Loan repayments are paid via PAYE based on your monthly earnings, you only need to repay if you earn enough in the tax year. So on the current £28,470/yr threshold, you’d pay if you earn over £2,372/mth. That means those on variable incomes, commissions, or who only worked part year, commonly overpay. If that’s you go to Overpayment Reason 1 in our guide.
The other reasons… you’re on the wrong Student Loan plan by default, you started repaying your loan too early, or you had money deducted once you’d cleared your loan. Step-by-step help those too in our reclaim overpaid Student Loans guide. There’s also a video explainer from me there.

In that guide, I go through in detail who should reclaim and who shouldn’t. Though the concepts are very similar to whether to voluntarily overpay (ie if you overpaid, and should voluntarily overpay, don’t reclaim)…

4. Time to overpay to reduce interest? (for some yes, many no)

With most normal interest-charging debt, I strongly encourage those lucky enough to have the money to do so to overpay, as it means you repay less in total and clear the debt quicker. Yet Student Loans don't work like normal loans! So, the decision is more complex. Two key facts before we start…

i) You can voluntarily overpay or pay-off your Student Loan at any point.
ii) If you overpay voluntarily (as opposed to unintentionally above) that’s it. You can never get that money back, so you need to be very sure and err on the side of caution.

So why don’t Student Loans work like normal loans…

In practice, Plan 2 Student Loans work more like a tax than a loan

- Repayments change with earnings as you repay 9% over the repayment threshold
- They’re wiped after 30 years if you’ve not yet cleared your borrowing plus interest.
- It is roughly projected (IFS/Govt) all but the top 20-35% of graduate earners on Plan 2 will repay for the whole 30 years until the loan is wiped (higher than it used to be, in the early days it was predicted only 17% would).

So, for most with Plan 2 loans making the standard repayments, it works like a 9% extra tax that they will pay for the majority of their working lives. That means on earnings above the Plan 2 repayment threshold

- Basic rate taxpayers pay 20% + 9% = 29% marginal tax (plus national insurance)
- Higher rate taxpayers pay 40% + 9%= 49% marginal rate (plus national insurance).

And this is crucial to remember if you look at your Plan 2 Statement, see interest accruing faster than you’re repaying it, and feel anger or fear. If not, you risk making a decision that’s not in your favour. Ultimately what you pay each year is based on what you earn not what you owe, and that means…

…with Student Loans, sometimes interest added isn’t the same as interest paid

The real impact of the amount you borrow, and the interest charged, isn’t on your annual repayments, it’s on whether you’ll clear the loan or not within 30 years. And it is predicted only roughly up to a third of all with Plan 2 loan will do that.

The two-thirds who won’t clear in full, won’t, by definition, repay what they borrowed plus all the interest (as if you did that you’d repay in full). Therefore, the total paid will be less than what you borrowed plus the interest added.

Some very low earners may not even repay the initial borrowing never mind any interest on top. Most will repay some of the interest added but not all of it. So, unless you’re a high-graduate earner, or on a trajectory to be one in future, the interest on your statement isn’t likely to be a fair representation of what you need to pay.

DON’T voluntarily overpay before trying to work out if it will help

For the majority of Plan 2 holders, it’s likely smaller overpayments, of say a few thousand pounds, may still leave you repaying 9% of your earnings for the full 30 years, in which case the overpayments won’t have any impact, and you will have just flushed that money away without any gain. As well as income, this depends on circumstances…

Overpayments more likely to help (as you’re more likely to clear in 30 years) if you…

Borrowed materially less than full tuition & living loan
Are on a career path where incomes accelerate rapidly
Are likely to work the full 30yrs with few breaks/time off/out of work (incl. long parental leaves)
Have a substantial amount you can overpay, for most with typical English loans meaning in the multiple £10,000s (as if you can clear all your current statement, then you stop paying).

And if the opposite is true, eg, long career breaks, borrowed full amount etc, then you’re less likely to gain from overpaying.

How do I work it out?

It's impossible to do it accurately. There are too many variables and assumptions, both on your career, income and on what will happen to the economy. I know you’ll hate that answer, so the best I can do is the prompt below I’ve drafted for you to cut and paste into a large-language AI where you can add your specifics (feel free to amend).

Warning: It’s AI, it doesn’t know, isn’t perfect and can hallucinate. The prompt covers the core info, and it worked on sense-check options I tried on various AIs (do try and put it in the more analytical complex, deeper thinking modes). I hope it may help give you a rough idea, but always do a sniff test to see if it seems right. Hopefully you’ve a reasonable idea where you fit on the graduate earning level.

I want you to estimate whether I’m likely to fully repay my UK Plan 2 Student Loan before it wipes after 30 years, assuming I make only the standard repayments. Please use actual past inflation, interest rates and typical graduate earnings growth where possible, and realistic assumptions about future ones. My details are:

Year I finished university (or years since graduation):
Current outstanding student loan balance (£):
Current gross salary (£ per year):
Typical annual pay rises (rough % or £):
Likely career path (eg, steady growth, rapid growth, public sector, private sector, uncertain):
Any expected changes to income (promotions, career breaks, part-time work, etc.):

Based on this, please estimate:

Whether I’m likely to clear the loan within 30 years,
Roughly how much I’ll repay in total (in today’s money),
Whether I’m likely to be in the group for whom overpaying might make sense,
and where I sit compared with other graduates (low / mid / high earners).
If possible, show a simple “likely / optimistic / pessimistic” scenario so I can see the range of outcomes.

If you’re close to it looking like overpaying works for smaller amounts, err on the side of caution. Over the years I’ve had too many painful questions from people, who’ve lost jobs or health, who’d voluntarily overpaid previously and want to know if they can get the money back – who hate being told it’s gone.

So if you have spare cash, and are in two minds, one option is stick it into a high interest savings account at over 4% interest, and while it may not cover the SLC interest, at least it mitigates some of its impact – and gives you time to see how things and your career develop.

For those where overpaying is a clear winner...

If you’re a higher earner, or have a large lump sum you can pay off, or a smaller loan, using the money to reduce or clear the debt you have now will save you significant interest in future. So, if you’ve got it, it can be very worthwhile.

Yet before you do, think about where you are in your financial life path. Are you going to need a mortgage deposit, or to pay off a mortgage, or other borrowing in the future? If so, then unless you have very substantial funds, overpaying the Student Loan now may just mean you need to borrow more back in future via a different form of lending.

And while the interest rate on the Student Loan may be higher (than some mortgages, but not most loans) it does have the crucial advantage that if your income drops or you lose work, your repayments drop or stop altogether – no commercial loan does that (nor will they wipe at some point). Again, if unsure, a top savings account while you wait and see what happens may be a safer interim route.

The design of Student Loan statements can be both frightening and misfocused. We’ve long campaigned for improvements, so they put greater emphasis on likely total repayments and explain the system more clearly.

As a counter, for likely at least fifteen years, I’ve tried to use a ‘it works more like a tax’ style model to try to explain the practical impact of Student Loans on people’s finances. For example in this 2017 mini student finance briefing blog, the core message was:

"This doesn’t make it cheap, but it does mean that all the talk of burdening students with debt is often misleading. Instead, we’re burdening students with higher taxes over a certain amount, and they should decide if that’s worth it. Remember, though, that just like tax, the ones who tend to pay more tend to earn more – so it’s to be hoped there is, financially at least, a ‘no win, no fee’ element here."

That ‘tax’ will feel even heavier with the coming repayment freeze, which could leave the threshold not much higher than future minimum wage. That means the ‘no win, no fee’ element is being rapidly diminished.

This system should have been called a Graduate Contribution System, similar to how other countries describe income-contingent systems. Not to soft soap it – a 9% extra tax is a real cost – but to help people understand how it works and to make it easier to grasp the impact of future government changes.

I feel I’ve gone grey arguing this, as in my old Plan 2 loans are broken’ blog shows. I had hoped some of these issues would be fixed by the government’s Augar Post 18 review of education and funding in 2018, which we spent a lot of time feeding into, but it was never properly implemented on the student finance side. And even though the government has changed, little has changed since. Maybe the current hostile feelings by many with Plan 2 loans, will be the catalyst that makes something happen.

5. How does Plan 2 compare to new Plan 5?

The new Plan 5 loans for those in England who started Uni since 2023 have quite different terms to Plan 2 (beware some media have recently confused them).

	Plan 2	Plan 5
Interest	Inflation (RPI) to inflation + 3% depending on income	Inflation (RPI)
Annual repayment threshold, pay 9% above	£28,470 (rising in April to £29,385 then frozen until 2029/30)	£25,000 frozen until 2027, then due to rise with inflation (but let’s see)
Loan wiped after	30 years	40 years

While Plan 5 interest rates are lower, set at inflation (what economists refer to as ‘no real interest’) the lower repayment threshold (not much more than full time minimum wage) and much longer repayment terms outweigh that and really drive the cost back.

More on Plan 5 will clear the loan in full (as it lasts longer) but they are projected to pay back far more in total than those on Plan 2. The Conservative Government’s own forecasts, when the new Plan 5 loans were announced, said it’d reduce the state’s contribution towards an individual’s university costs from 44p in the pound to 19p - in other words, a big pendulum swing towards the individual contributing more.

[Ultimately on Plan 5 if university is right for you, you should still go, but the ever-increasing financial burden means it will be right for fewer people, as the trade-off gets ever harder.]

For all those angry about Plan 2 at the moment, this is worth bearing in mind, sadly the mood music is not playing a good tune for change. It will take a monumental change of political view for different things to happen.

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PS: The biggest problem impacting current students, are that English living loans have fallen well behind inflation, leaving many struggling to afford the basics. Worse as the parental contribution starts at family income of just £25,000 - the same as it was back in 2008 - even though inflation means it should’ve increased by well over 50%

PPS: I’m often asked, 'who pays if the graduate doesn't repay in full.' See my old if students don’t repay who does blog for a few conceptual thoughts on that.