Analysis · IFS | Institute for Fiscal Studies · 27 February 2026
Options for changing Plan 2 student loans: costs, benefits, and distributional effects: What It Means for Your Student Loan
Written by Zubair Arshed FIA, Chartered Actuary
Fellow of the Institute and Faculty of Actuaries
Actuarial Post Life and Health Actuary of the Year 2024
The Institute for Fiscal Studies has published an analysis of the options for reforming Plan 2 student loans, weighing up the costs, benefits and who wins or loses. If you borrowed for an undergraduate degree in England between 2012 and 2023, these are the levers that could reshape what you actually repay, so it pays to understand how each one works.
This analysis responds to reporting by IFS | Institute for Fiscal Studies. We recommend reading the original alongside it: Options for changing Plan 2 student loans: costs, benefits, and distributional effects ↗
What has the IFS actually reported?
The IFS has produced a study setting out a menu of options for changing Plan 2 loans, the system that covers most English undergraduates who started between autumn 2012 and summer 2023. The piece looks at costs to government, benefits to borrowers, and the distributional effects, meaning who gains and who loses across the earnings spectrum. This is research and policy analysis, not a government announcement, so nothing here is confirmed as coming into force.
Plan 2 is a natural target for this kind of work because it sits awkwardly. It carries the highest interest rates of any current plan, RPI plus a sliding scale of up to three percentage points depending on income, and its repayment threshold of £29,385 is frozen until at least April 2030. That freeze quietly drags more of your salary into the 9 percent repayment zone every year as wages rise with inflation.
The usual levers the IFS would examine are the repayment threshold, the interest rate, the repayment rate of 9 percent, and the 30-year write-off period. Each one shifts the burden between graduates and taxpayers, and between lower and higher earners, in different ways. Understanding which lever is being pulled matters far more than the headline word reform.
What would each option mean for your Plan 2 repayments?
Take the interest rate first, because Plan 2 is unusual in charging real interest above inflation. If you earn £52,884 or more, you currently accrue RPI plus 3 percent. Cutting the maximum rate to RPI only, as Plan 5 already does for newer borrowers, would slow how fast your balance grows but would mostly help higher earners who are on track to clear their loan. If you will never repay in full before write-off, a lower interest rate changes your balance on paper but not a penny of what you actually pay.
Now the threshold. It is frozen at £29,385, and every year of freeze is a stealth increase in your repayments. Suppose you earn £40,000. You repay 9 percent of the amount above the threshold, so 9 percent of £10,615, which is roughly £955 a year. If the threshold were lifted to, say, £32,000, you would repay 9 percent of £8,000 instead, about £720 a year. That is £235 back in your pocket annually, and it flows to middle earners rather than the very top.
The write-off period is the third big lever. Plan 2 currently wipes any remaining balance after 30 years. Extending it, as happened when Plan 5 moved to 40 years, would keep you paying for longer and hit those who never clear their debt, typically lower and middle lifetime earners. Shortening it would do the reverse. Small print like this decides your total cost more than the headline interest rate does.
How would different borrowers be affected?
The distributional sting is the whole point of the IFS exercise. Cutting interest rates helps high earners most, because they are the ones who repay their full balance plus interest. If you are a doctor or a lawyer on a steep salary curve, a lower rate could save you thousands over the life of the loan. If you are on a flatter earnings path and heading for write-off, that same change does almost nothing for you.
Raising the threshold works the other way. It hands the biggest proportional benefit to middle earners, the graduates repaying steadily but not fast enough to clear the debt. Lower earners below the threshold pay nothing either way, so a threshold rise does not reach them at all. Extending write-off would quietly claw money back from exactly the group a threshold rise helps.
There is a timing point too. The Plan 2 threshold freeze to April 2030 is confirmed policy, so absent reform your repayments will keep creeping up in real terms for the next four years. Any option that unfreezes or raises the threshold is effectively a reversal of a decision already banked by the Treasury, which makes it more expensive for government and therefore less likely without a wider funding settlement. You can model how the current freeze affects your own repayment total using the StudentLoanCurve calculator.
What is the likely future impact?
If a future government lifted the Plan 2 threshold from £29,385 to around £32,000, a borrower earning £40,000 would save roughly £235 a year, while a cut in the maximum interest rate from RPI+3% to RPI would mainly benefit high earners clearing their balance in full.
This is IFS research setting out options, not confirmed policy. The only firm commitment in play is the threshold freeze to April 2030, which points against near-term rises. Any actual change depends on political choices and a spending settlement that have not been made, so the direction and size of reform remain speculative.
See what this means for your own loan
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