Half of graduates would refuse a student loan today, treasury inquiry warns

More than half of Britain’s graduates would walk away from a student loan if they had the chance to decide again, according to one of the largest public responses ever received by a parliamentary inquiry, a finding that should rattle ministers, universities and employers in equal measure.

The Treasury select committee, which scrutinises financial policy, launched its probe into student loans earlier this year amid mounting evidence that high interest rates and ballooning balances are weighing heavily on a generation of workers. Its call for evidence drew more than 52,000 responses inside a month, among the biggest hauls the committee has ever logged, and the verdict from the field is uncomfortable reading.

Of the 49,000-plus respondents who hold a loan, 57 per cent said they did not understand the terms and conditions of their repayments at the point of signing, and 51 per cent said they would not take one out again. Yet 91 per cent admitted, with equal candour, that they could not have gone to university without one, a tension that lies at the heart of the policy headache now facing the Treasury.

The milestones being put on hold

For a magazine that speaks to small business owners every day, the most striking finding is not the headline figure but the behavioural fallout. Respondent after respondent told the committee that the monthly drag of repayments was forcing them to defer the very life decisions that drive consumer demand and entrepreneurial risk-taking: buying a first home, starting a family, even accepting a promotion that nudges them into a higher repayment band.

That dovetails with a separate review by Sir Alan Milburn, the government’s jobs tsar, which found that one in ten so-called NEETs, young people not in education, employment or training, now holds a degree. Sir Alan told the Financial Times that “employers are demanding skilled labour, but the education system is not providing it,” a complaint that will resonate with SME owners who have watched the NEET total edge towards one million while vacancies in skilled trades remain stubbornly unfilled.

£53,000 of debt and an interest rate that bites

The numbers are stark. The average graduate now leaves university with roughly £53,000 of debt. From the April after graduation, they hand over 9 per cent of any earnings above a threshold ranging from £25,000 to £33,795, depending on which loan plan and which nation of the UK applies. Add a postgraduate loan to the mix and a further 6 per cent is sliced off income above £21,000.

The fiercest criticism is reserved for Plan 2 loans, taken out by those who studied between 2012 and 2023. Interest is pegged to the Retail Prices Index plus up to three percentage points, depending on earnings — a formula that, as the Institute for Fiscal Studies has repeatedly argued, means most Plan 2 graduates watch their balances grow despite making monthly repayments. Respondents to the committee described the regime as “excessive, outdated and incoherent”, with 93 per cent saying the level of interest and the repayment terms were unreasonable.

A marginal tax rate that drives talent abroad

For higher earners, the arithmetic looks even more brutal. A UK worker holding both an undergraduate and a master’s loan, earning above £50,270, faces a marginal tax rate of 57 per cent, 40 per cent income tax, 2 per cent national insurance, 9 per cent in undergraduate repayments and 6 per cent on the postgraduate slice.

Little wonder, then, that the survey picked up a steady drumbeat of graduates either planning, or actively considering, a move overseas. Loan repayments follow them across borders, but the appeal of more benign tax regimes is doing its quiet work, a brain drain risk that employers, particularly in technology, finance and life sciences, can ill afford.

Class inequality, social mobility and the SME workforce

The committee did not pull its punches on the wider social impact. It concluded that student loans were “entrenching class inequality and undermining social mobility”, because wealthier families can simply pay tuition upfront and sidestep the interest-bearing debt altogether. The repayment burden, it added, was making it harder for graduates to build emergency savings, contribute to a pension or open an ISA — exactly the kind of long-horizon thrift that an ageing population requires.

Dame Meg Hillier, the committee’s chair, was uncharacteristically blunt: “It’s imperative for the prosperity of our country that people in their twenties and thirties feel incentivised to work hard and build successful careers. Unfortunately, what these findings tell us is that far too many young people feel overburdened and demoralised by their student debt.”

That sentiment will land squarely with SME employers, who have long argued, as Business Matters set out in its own analysis, carried out by Trends Research, of why universities should be forced to tell the truth about graduate jobs and debt, that the value proposition of a UK degree has slipped badly out of kilter with the realities of the modern labour market.

What should ministers do next?

The inquiry, kicked into life partly by The Sunday Times’s End the Graduate Rip-Off campaign, will report later this year. Three reforms are likely to dominate the debate: a meaningful cut to the RPI-plus interest rate; a recalibration of repayment thresholds to reflect post-pandemic wage settlements; and far clearer disclosure at the point of sign-up, so that 18-year-olds know what they are committing to before the ink is dry.

For business owners, the political conclusions matter less than the practical ones. A workforce that is reluctant to relocate, postpones home ownership, delays family formation and eyes the Heathrow departure board is not the workforce the UK needs to power growth in the second half of the decade. The Treasury Committee has handed Westminster a 52,000-strong reminder that student finance is no longer a campus issue, it is a business issue.