Why This Labour Government Needs to Fix the Tory Student Loan Fiasco

Whatever reason you joined the Labour Party, a belief in social mobility is likely to be part of it. We share a belief that someone's background shouldn't define them and that the state should make it possible for anyone to achieve.

That is the belief that lay behind the New Labour government's expansion of university places. For university education to be open to everyone rather than being the preserve of the already privileged.

But the current student loan system has created a perverse disincentive. Graduates, particularly those on Plan 2, are facing a debt that will spiral during their working life with up to 87% of graduates projected to not pay back their loans.

That means the majority of graduates paying back their loans at a rate of 9% on top of their tax rate and pension contributions. A whole generation of young people disincentivised to progress in their career or to increase their productivity.

This is yet another example of a mess left by the Tories that this government has inherited. And, in a pattern that is becoming tiresomely familiar, a mess cheerfully ignored by the media - and the Leader of the Opposition - until it has become our responsibility.

But that is the point of national renewal. To fix the foundations of our country so that it once again becomes a place where everything is possible for everyone.

And our government has started addressing some of these issues. The recent announcement that interest rates on plan 2 and plan 3 loans will be capped at 6% was welcome. It will address some of the spiralling costs that graduates were facing.

But it doesn’t go far enough.

This is not the time for smoothing rough edges. It is the time for making radical decisions that will make a difference to the lives of thousands of young people. Decisions that will unlock opportunity and help to drive economic growth and social progress.

In Leeds Central and Headingley, we have the highest proportion of students for any parliamentary seat in the UK. It is right, therefore, that this becomes a campaigning issue for us. We, like many urban seats, are facing a real challenge from the Green Party. Addressing challenges like this will be crucial in helping us to fight off electoral challenges.  

Last month, we agreed a motion to provide a structure for our government to deal with this issue and to create retail policies that will sell on the doorstep.

Firstly, we are asking the government to unfreeze the repayment threshold. By maintaining the thresholds as they are, thousands of graduates are repaying their loans before they have a chance to earn the benefit of a university degree. As it stands, first year teachers and nurses are having to pay back 9% of their starting salary preventing them from saving for their first house or joining their pension scheme.

Secondly, we are calling for an Australian-style student debt cut. Inspiration from our antipodean friends shouldn't just be confined to immigration. Last year, Anthony Albanese cut all student debt by 20% which wiped $16 billion from the loans of almost 3 million Australians. This would have a significant cost attached to it but, by lifting the burden of debt on recent graduates, would give people a sense that they might be able to repay their debt increasing productivity and aspiration.

Finally, we are calling for an end to the 3% additional interest that Plan 2 graduates are paying on their loan in addition to RPI. This additional interest was planned by the coalition government to cover the shortfall caused by those who can afford to pay back their loan in full or those who will never pay it back. But let's call it what it really is. This is a social mobility tax. It is ensuring that graduates who needed the loans to attend university are paying for those whose parents could afford to pay for them.

We know that this is an opportunity for our government to win a generation of voters to our party and to show that Labour in government is delivering for them. We are calling on CLPs across the country to make the same demands. Join us by using the model motion below at your next CLP or BLP meeting and let's change Britain together.

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Model Motion on Student Loan Repayments

<Name of area> CLP notes that:

• Plan 2 student loans introduced by the Conservative-Liberal Democrat coalition government are regressive and unfair.
• Graduates are paying 9% loan repayments each month creating a 37% marginal tax rate.
• Additionally, interest rates change throughout the life of the loan 3% plus Retail Price Index rate (3.2% in March 2025).
• This means that most graduates (current estimate is 83%) will never repay their student loan.

<Name of area> CLP believes that:

• University education benefits individual students, university communities and our national economy.
• The current system of Plan 2 repayments is unfair, regressive and disproportionately affects working people.
• Until tuition fees are abolished, any system of student loan repayment should be progressive and ensure that low and middle income earners do not pay more than higher earners.

<Name of area> CLP resolves to write to the Minister for Higher Education and Chancellor of the Exchequer to ask the government to:

• Urgently review the Plan 2 student loan repayment system to unfreeze the threshold of repayments and ensure that it rises with CPI inflation thereafter.
• Introduce an Australian-style student debt cut.
• Scrap the additional 3% interest rate paid on top of RPI by Plan 2 graduates. 
• Replace RPI with CPI for all student loans.

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Tom Clements is Vice Chair of Leeds Central and Headingley CLP.

All blog posts represent the views of the author alone and not necessarily those of Mainstream.