Government ought to step in and resolve unjust scholar mortgage drawback – no person ought to have a 40-year debt they cannot repay, says LEE BOYCE

When you take out a personal loan, you know exactly what you’re signing up for.

Let’s say you borrow £10,000 over five years at 6.2 per cent, as offered by a major high street bank – a calculator will spit out the monthly sum you must shell out to pay it off, along with how much interest it’ll cost you.

In this example, the interest on £10,000 is £1,608. So, if you stick to the terms, you’ll end up paying £11,608 in total and then it’s done and dusted when you’ve paid your £193.47 monthly for 60 months.

You know exactly where you stand. It’s clear.

What this leads me onto is something I believe is a great injustice of modern financial times – Plan 2 student loans.

When I had just turned 18 in 2005, I signed up for a student loan to put me through university. Nobody at school talked me through the financial implications, nor did my parents.

For me, that ended up not being such a big deal. My student loan interest was set at the inflation rate. While it felt like I’d never pay it off when I first started employment, I did – and that took 13 years.

Once it was gone, it felt like a weight lifted, an achievement, another small step towards financial freedom.

But when I took it out I had signed on that dotted line with reckless abandon, like many other young adults. Signing up to a student loan was just a thing that you did and the details were never really explained.

A conversation in the This is Money office as I was writing this reveals both publisher Simon Lambert and deputy editor Helen Crane also agreed that no one ever properly explained what their student loan entailed.

A lack of financial information at school is partially to blame for the situation we’re in now, along with a common parental tendency to clam up about the topic of money.

Add to that a general feeling that you should just be able to trust an official financial system to treat you fairly, and you can see why so many say they had no real idea what they were signing up to with a student loan at the tender age of 18.

I got lucky though, it’s the generation after me that’s really been stung.

For this Plan 2 student loan cohort – so those who took out loans from 2012 – a reckoning has landed.

Their loans were needed for £9,000-plus tuition fees and living expenses, so much bigger and on far worse financial terms. 

Their interest rate is RPI inflation plus up to 3 per cent and they pay 9 per cent of their salary above £28,470.

Now some of these graduates are in their 30s and earning well, but find monthly payments towards their student loan are not even covering the interest, leaving them feeling trapped.

I can only imagine how frustrating that situation is. Sure, you can treat it as a tax – 9 per cent of your salary being hoovered out each month – but the reality is, it’s sickening, seeing your debt number continuing to balloon despite paying towards it.

You can say ‘well it’ll be written off after 30 years’ (40 years for those taking out loans now) but that is a long time. 

Leave university at 22, start earning over the current annual repayment threshold of £29,385 (from April 2026) at 25, have the debt until you’re 55 if it doesn’t get paid off.

Nine per cent of your salary that could have gone into a pension, on saving a house deposit, or for living in the here and now.

This will become a hotter political potato in the coming years. If Labour doesn’t act on this unfair system the Conservatives brought in, they are essentially sticking two fingers up at a major chunk of potential voters.

Indeed, it looks likely two opposing forces – Green and Reform – will attempt to woo typical Labour voters by offering some sort of reprieve to students.

One Labour backbencher recently pointed to Prime Minister Anthony Albanese helping to kill off the Green Party threat in Australia by reforming student loans. His popularity soared almost overnight.

Currently, Labour is doubling down with Rachel Reeves freezing the salary thresholds for Plan 2 student loans at £29,385 until 2030, dragging more into the repayment net. This is using student loans for fiscal drag.

That’s not really the issue though. The real issue is not being able to make a dent into the debt as interest continues to mount like a runaway train – it’s been as high as 8 per cent in recent years.

There are believed to be 5.8million graduates who took out a student loan between September 2012 and July 2023 – a large number are simply seeing the amount they borrowed rise and rise.

What can be done? An interest cap perhaps? If you borrowed £50,000, surely a 10 per cent total on top of that would be sufficient – so £10,000 – alongside a lower threshold of when you start paying it back.

At least then you can start making a meaningful dent on the amount borrowed.

I don’t think any student or graduate expects a 0 per cent interest rate, but paying off a debt, gradually, and finally getting to the end of the tunnel is a magic feeling that shouldn’t take three or even four decades to achieve. It’s cruel.

I listened to LBC Radio a little while back where some graduates were in tears explaining how trapped they felt. You can also find plenty of angst on social media.

Marriage plans on ice, house buying plans scuppered, a feeling of not being able to start a family as the student loan spectre sucks out household finances. It’s a disgrace quite frankly.

We’ve covered the topic in various forms over the past decade.

Our columnist Andrew Oxlade wrote about it from a parental viewpoint, describing the student loan decision as roulette, while our former reporter George Nixon in 2019 was aghast at paying just £26 back on his student loan over the year – while the interest dwarfed this at £2,285.

There will be some with little sympathy: graduates, they knew what they were signing up for, they should be smart, I didn’t go to university, they are likely to earn more over their career, etc etc.

I don’t buy those arguments. For many, university is crucial to get into the career they want, and a social experience that unlocks the ultimate networking opportunity.

My two daughters are young, but if they want to go to university in the future, I will of course encourage it… if it’s a crucial element of their potential career pathway.

However, I will not let them take out a student loan (unless the system is made fairer).

That’s why my wife and I save £75 per month each for them. The pot is growing. By the time they reach 18, it’ll be enough to pay their tuition fees if needed. I urge you do the same for your children or grandchildren so the option is there.

University shouldn’t be inaccessible though. I would never have been able to attend if it wasn’t for a student loan.

But it’s time to step up and invest in the future generation. Not university for all, ala 1997 New Labour, but not debt millstone university ala 2010 Conservatives.

Somewhere in the middle – a reasonable loan term with an interest burden that doesn’t put life on pause once you start growing as an adult in the real world.

Expert Dan Neidle of consultancy Tax Policy Associates points out student debt contributes to very high marginal tax rates – this can make climbing up the career ladder a drag. What a sad state of affairs.

University should be for our smartest youngsters who are not put off by horror stories of hideous debt, regardless of background.

This was originally published in the weekly This is Money newsletter, which goes out every Thursday at 6am with the best money stories, straight to your inbox. Sign-up below: