Outrageous levels of student debt are putting immense pressure on the UK’s economy

The Costly Road to Becoming a Doctor

Tom’s journey to medicine was far from straightforward. Although he had long aspired to attend medical school, disappointing mock A-level results at age 17 nearly derailed his plans. During a hospital work placement, a consultant even advised him to abandon his dream.

Undeterred, Tom pursued a science degree followed by a two-year master’s program to qualify as a physician associate. However, his hospital experience only strengthened his resolve to become a doctor. Ultimately, he enrolled in a four-year graduate medical program.

This indirect route left Tom with a staggering amount of student debt—currently £112,000, and still rising. As he prepares to complete his medical degree and begin working, the interest accumulating on his loans far exceeds what he will be able to repay each year.

According to estimates from RSM, an accountancy firm, Tom will pay back around £1,650 in his first year as a resident doctor, while interest charges will add approximately £4,700 to his debt in the same period.

“It’s overwhelming. The interest just keeps compounding, and I can’t see a way to ever clear the balance,” Tom explains. He requested anonymity due to the sensitive nature of his financial situation.

Despite his passion for his work and a decade of service in the NHS, Tom finds the financial burden deeply discouraging. “I’m not in this for the money—I genuinely love what I do. But it feels like I’m being penalized for pursuing a meaningful career.”

Tom’s predicament highlights the broader issues with England’s student loan system, which is placing a heavy strain on both individuals and the wider economy. In 2024-25, interest added to student loans in England reached £15 billion, while repayments totaled only £5 billion.

The shortfall ultimately falls to taxpayers, increasing the financial pressure on the working population. Meanwhile, the loans are failing to adequately support universities, many of which are facing severe financial challenges.

“The system is completely broken,” says Labour peer Baroness Margaret Hodge.

Soaring Student Debt

While Tom’s debt is unusually high, the outlook for most graduates is also grim. Policy changes made over a decade ago have driven the cost of higher education to unsustainable heights, gradually eroding ambition.

In 2011-12, total outstanding student debt in England stood at £40 billion, with the average graduate owing £16,500. The following year, the coalition government led by David Cameron dramatically increased tuition fees to £9,000 per year and introduced a new loan system.

This shift transferred the financial burden from taxpayers to students, allowing universities to admit more students and broadening access to higher education. However, the result has been a 562% increase in outstanding student debt, which reached £267 billion after these reforms.

By 2024, the average graduate owed £53,000 when they began repayments—more than triple the average from 2011. Student enrollment surged, with the proportion of 18-year-olds from underrepresented areas rising from 14% in 2012 to 23% in 2023. The government now lends around £21 billion annually to 1.5 million students.

There are some benefits: repayments only begin once graduates earn above £28,470, and are set at 9% of their salary, making them more manageable for lower earners. Any remaining debt is written off after 30 years.

However, significant drawbacks exist. For “Plan 2” loans (issued between 2012 and 2022), interest rates can be up to three percentage points above the retail price index (RPI), a measure many experts believe overstates inflation. Higher earners face even steeper rates, while those with “Plan 1” loans (before 2012) pay the lower of RPI or the Bank Rate plus one percentage point.

When RPI spiked following the pandemic and geopolitical events, interest rates on Plan 2 loans soared. Government intervention capped rates, but they still peaked at 8% in 2024. In recent years, interest charges have far outpaced repayments, compounding the debt crisis.

Calls for Reform

Labour MP Luke Charters is campaigning for student loan reform under the banner “Gorila”—graduates opposing repayment injustice and loan arrangements. He has described England’s student loans as “a mis-selling scandal.”

Oliver Gardner from Rethinking Repayment notes that many graduates received poor advice and did not realize their interest rates would increase with their income, nor that the debt could affect their ability to secure a mortgage.

“It’s unrealistic to expect a 17-year-old with no income or tax experience to grasp what a 9% marginal tax rate means,” Gardner says.

The high costs make it increasingly difficult for graduates to save or enter the housing market. Charters warns that this could create a future crisis, with many unable to save adequately for retirement and some opting out of workplace pensions altogether.

He refers to the current student loan system as “Frankenstein’s monster,” trapping an entire generation in financial hardship.

The Impact on Ambition and Earnings

The effects of the student loan system extend beyond personal finances. Critics argue that the structure discourages ambition and hampers economic growth. While repayments are manageable for lower earners, high earners face steep marginal tax rates.

Tom, for example, aspires to become a consultant with a potential salary exceeding £100,000. However, he is wary of crossing this threshold, as it would subject him to a marginal tax rate of 71% when student loan repayments are included. With an additional postgraduate loan repayment of 6% above £21,000, his effective marginal rate would reach 77% for earnings above £100,000. According to AJ Bell, this means he would keep only 23p of every extra pound earned above that level.

“I’d rather reduce my hours than lose so much to repayments and taxes,” Tom admits. He and his partner have discussed deliberately keeping their income below the threshold to avoid excessive deductions.

Barriers to Higher Education

The daunting prospect of large debts is also deterring students from lower-income backgrounds from pursuing higher education. Alex Stanley, vice-president for higher education at the National Union of Students, expresses concern that the system is increasingly discouraging working-class students from applying to university.

Baroness Hodge recalls speaking to sixth-formers in her former constituency, where fear of debt was a significant factor in their decisions about university. She notes that the idea of not having to repay the debt is not reassuring for many from less affluent backgrounds.

Official data shows that enrollment among 18 to 20-year-olds from “higher” working-class backgrounds declined from 34% to 32% between 2022 and 2024.

Rethinking Repayment advocates for reducing the repayment rate from 9% to 5% and introducing a cap on interest charges. The 2019 Augar Review recommended that total repayments should not exceed 1.2 times the original loan amount. Charters suggests allowing graduates to opt for lower repayment rates in exchange for longer loan terms, easing cost-of-living pressures without additional government spending.

“There was a lack of foresight when the system was designed,” Charters reflects.

Financial Consequences for the Public

England’s mounting student debt poses a significant challenge for public finances. Between 2022-23 and 2024-25, the value of loans written off increased by 415% to £304 million. While this figure is currently modest, the government anticipates it will soar to nearly £30 billion annually by the late 2040s as the first cohort of high-fee graduates reach the end of their loan terms. An additional surge is expected in the late 2060s when Plan 5 loans, with 40-year terms, are written off.

Since 2018, the Office for National Statistics has required the government to account for the portion of student loans unlikely to be repaid as government expenditure rather than assets. This adjustment immediately created a £12 billion gap in public finances.

As a result, student loans are projected to add an average of £10 billion per year to public debt from 2025-26 to 2030-31, according to the Office for Budget Responsibility. With the UK’s national debt already rising rapidly and annual interest payments exceeding £100 billion, the problem is set to worsen.

The Department for Education forecasts that annual student loan spending will increase by 26% between 2024-25 and 2029-30, reaching £26 billion. Outstanding loans are expected to grow from £267 billion in March 2025 to £500 billion by the late 2040s (in today’s prices).

To recoup some costs, the government has kept interest rates high, knowing that many borrowers will never fully repay their loans. Those who do repay in full effectively subsidize those whose debts are written off. Additionally, a three-year freeze on the repayment threshold for Plan 2 loans from April 2027 will bring in an extra £400 million annually through “fiscal drag.”

For new borrowers, Plan 5 loans (for courses starting in 2023) have a 40-year term and a lower repayment threshold of £25,000, but also a lower interest rate. These changes mean more graduates are likely to repay their loans in full, with the government projecting a rise from 32% for the 2022-23 cohort to 56% for those starting in 2024-25. However, substantial reform appears unlikely in the near future.

Britain’s Unique University Funding Model

Compared to other wealthy nations, the UK stands out for its high university tuition fees for domestic students. According to the OECD, British students at public institutions pay more than their counterparts in any other developed country, and government funding for universities is among the lowest in the OECD.

In the past, university funding combined student loans with direct government grants linked to course costs, providing more support for expensive programs like engineering. The 2012 reforms shifted the focus to tuition fees funded by student loans, while government grants were reduced.

“They knew from the start that much of the loaned money would never be repaid,” says Baroness Wolf. “It wasn’t that public funding disappeared, but it was disguised as large student loans.”

This approach led to a surge in student numbers and a temporary boost in university finances. However, as the tuition fee cap failed to keep pace with inflation and grants were cut, real-terms funding per student fell by 35% over the decade to 2025-26. Last year, 40% of universities operated at a deficit, leading to job cuts and mergers.

Baroness Wolf argues that the system creates perverse incentives, discouraging universities from offering costly, lab-based courses that are vital for the economy. Instead, many have turned to cheaper courses of questionable value and rely on international students to subsidize domestic tuition.

The Augar Review recommended reducing the tuition fee cap and increasing teaching grants, but the government did not implement these changes. Instead, the latest budget will allow tuition fees to rise with inflation from 2026 and introduce a £925 charge per international student from August 2028, a move that university leaders warn could harm institutions dependent on overseas income.

Is the System Sustainable?

The expansion of degree programs has not necessarily driven economic growth, but has increased the pressure for more people to obtain degrees to remain competitive in the job market. While apprenticeships could provide an alternative, progress has been limited.

Another major cost for universities is the Teachers’ Pension Scheme, which requires employer contributions of 28.7% of a lecturer’s salary. Half of UK universities are legally required to offer this scheme. Vivienne Stern, chief executive of Universities UK, notes that this is one of the highest employer contribution rates in the country. UUK has called for more flexibility in pension options, similar to what independent schools enjoy.

Regulatory requirements also add to universities’ costs, as they must comply with rules on preventing harassment, protecting free speech, and more. “We’re regulating for a system we can’t afford,” Stern observes.

Regardless of the solution, urgent action is needed. “The current system isn’t working for anyone,” Stern concludes. For students, the growing debt burden is a powerful deterrent. “I want a career that makes a difference,” Tom says. “But young people have to ask themselves—how much are they willing to pay for that opportunity?”