The student loan system — and its danger for Keir Starmer and Labour

When Patrick Ba-Tin was offered a new job with a £15,000 pay rise, the decision was obvious — it was not worth taking. As a graduate, the resulting jump in his student loan repayments plus the extra tax would have swallowed up almost 60 per cent of the increase, which, added to thousands of pounds in commuting costs, meant little reward for more responsibility and longer hours.

“We were told at school it was the best value loan you would ever get, that you would barely notice the payments,” said Ba-Tin, 30.

He now says choosing in 2013 to do a degree in central European studies at the University of Glasgow was a poor financial decision. “I don’t see it as feasible that I would ever pay it off. I graduated with £42,000 of debt and even though I’m paying it off, it’s now £72,000,” he said.

About 8.7mn people in the UK have outstanding student loans, FT analysis of Student Loans Company data shows. Since the loans were introduced in 1990, repeated changes to the system have seen graduates contributing ever more to the cost of their education.

In last November’s Budget, UK chancellor Rachel Reeves announced a freeze on salary thresholds, meaning graduates will have to repay more. Since then, the so-called “tax on ambition” imposed by the loan system has become a rallying cry for a generation that feels it has been getting a raw deal from the government.

Martin Lewis, the consumer champion who has a bigger following than most political parties, described the Budget freeze as “not a moral thing”.

Ba-Tin’s anger at the system is palpable: “Why would I trust a government that mis-sold me a loan when I was a child?”

He is not alone. A political awakening is happening among a generation of graduates that has set alarm bells ringing in Westminster.

A group of Labour MPs has begun quietly organising to push the issue up the political agenda and get the government to respond.

“There will be 10mn people with student loans by the next election. Add in parents and you’re talking 20mn. We can’t afford to lose them,” said one, speaking anonymously after being warned by ministers not to talk about the issue.

MPs argue that the government needs to come up with a solution before the next election, pointing to how a promise by Australia’s Labor Party to cut student debt by 20 per cent helped Anthony Albanese defy expectations and win a second term last year.

The issue has even featured in speculation about Sir Keir Starmer’s leadership, with Labour backbenchers pointing out that health secretary Wes Streeting, on entering Parliament a decade ago, helped lead a campaign against changes to student loan terms. Streeting, now a potential rival to the prime minister, said this week that debate on reform was “worth having”.

The student loans system is ferociously complex and has been overhauled many times since tuition fees were introduced by the last Labour government in 1998. In England, the worst hit by the Budget were those who started university between 2012 and 2022, who face interest rates of up to 6.2 per cent.

These graduates will be worse off by £3,155 over their lifetime as a result of the Budget freezes, according to the Institute for Fiscal Studies (IFS). In 2023, the system in England was changed to make it less punitive for high earners, with interest rates no longer rising with income.

Policy on student finance is devolved, and Wales remains on the same plan as England between 2012 and 2022. Scotland and Northern Ireland are on different plans, although they charge the same interest rates as charged in England at present.

Ollie Gardner, a 26-year-old economics graduate, started the Rethink Repayment campaign last year to press home the unfairness he saw in the system. “Young people who were told to go to university to get a professional job are being hit by this very high marginal tax rate, and it’s become much harder for them to buy a home or start a family,” he said.

The IFS calculates that the government will make £800mn in profit on the loans of students starting in 2022, who will now pay 97 per cent of the total cost of their university education, compared with 70 per cent if the government had stuck to policy as stated in 2012.

Gardner believes the government saw going after young people as “an easy option” as they were unlikely to protest, in contrast to pensioners who have mobilised to protect policies such as the triple lock on state pensions and forced a U-turn on the removal of winter fuel payments.

Nick Hillman, of the Higher Education Policy Institute, who was a government adviser when the regime for students between 2012 and 2022 was introduced, acknowledged the political incentive to load costs on to graduates. “The reason this cohort is paying for the entirety of its education, which was not what was promised, is that the state has been able to get away with it because they haven’t had pushback until now,” he said.

But Hillman argued that “if you play around with the loan to reduce the burden then there is a real cost to the government to that, and the cost is likely to land on people who don’t have degrees”.

The Department for Education was approached for comment.

For all the anger, the campaign against student loans has yet to come up with a clear set of demands. In part, that is because the complexities of the loan system mean it is unclear what problem graduates should protest about.

Outstanding balances are growing rapidly, and many graduates repay thousands a year only to see their debt rise because of interest. Cutting rates would address this concern.

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Yet as loans are written off after 30 years — 40 years for those who started university from 2023 — half of graduates will never fully pay them off, making their outstanding balance moot. For them, the bigger issue is the extra tax they will pay every month for decades.

Labour MPs are now working with sympathetic think-tanks to find costed proposals for reform. Options being discussed range from cutting interest rates and increasing thresholds to allowing people to switch between loan plans depending on their circumstances. Gardner’s preferred option — cutting repayment rates from 9 per cent of income to 5 per cent — is seen by some MPs as too expensive, although few reliable figures exist.

Ba-Tin says his loan has left him behind “where I should have been” in life, unable to afford to even think about starting a family.

Loan policy will “definitely affect how I vote”, he said: “My generation has known we haven’t had a good deal for 15 years. It’s only now that we’ve actually got to an age where we vote and realise that we matter.”