Student loans: The growing debate, and the hidden impact on your mortgage affordability

TLDR:

• The UK student loan system has been under renewed public scrutiny after Chancellor Rachel Reeves confirmed the repayment threshold will stay frozen at £29,385 until 2030, meaning more graduates will repay larger amounts as wages rise.
• Under Plan 2 loans, graduates repay 9% of income above £28,470, while interest can reach around 6% or more, meaning balances can grow even while repayments are made.
• Around 5.8 million people took out Plan 2 loans between 2012 and 2023, with more than 2.6 million owing over £50,000.
• From our analysis, we’ve found that student loan repayments reduce the income lenders consider when assessing mortgages, potentially cutting borrowing power by £20,000–£30,000. See what you could be offered.
• Off the back of the public outcry, the Treasury Select Committee has now launched an inquiry into how fair the current system is for graduates

What kicked off the wider student loan debate?

While scrutiny in Parliament is new, the debate itself has been bubbling for months. It all kicked off when Chancellor Rachel Reeves announced that the student loan repayment threshold would remain frozen at £29,385 until 2030.

At first glance, that might sound minor. But freezing the threshold effectively means that as wages rise, more graduates will be pulled into repayments or will pay more of their income towards their loans. In other words, pay rises may not feel like much of a pay rise once student loan deductions increase.

That decision has sparked criticism from campaigners, financial experts, and graduates themselves, not helped by the report from the Institute for Fiscal Studies (IFS) highlighting how complicated and costly the system has become.

How do student loans currently work?

For Plan 2 student loans - the ones currently under public scrutiny - graduates repay 9% of anything they earn above £28,470 per year. So the more you earn, the higher your repayments.

For example:

• If you earn £38,470, you repay 9% of £10,000
• That works out to £900 per year, or £75 per month

However, your loan also earns interest, which is linked to Retail Prices Index (RPI) inflation - currently around 3.8% - with up to an additional 3% added depending on income. This means borrowers can face interest rates of around 6% or more. And because of that interest, many graduates see their loan balance increase even while they’re making repayments.

The loans are written off after 30 years, but most analysts believe a large share of borrowers will never repay their loans in full. Plus, even if the loans are wiped off after 30 years, before that point, many graduates are seeing hundreds of pounds leave their salaries each month.

This is part of a wider financial burden facing people in their 20s and 30s that can prevent them from building a house fund, making adequate contributions to their pensions, or even building an emergency fund to help weather financial hardships like redundancy.

How big is the scale of the issue?

The size of the student loan system is enormous. Between 2012 and 2023, around 5.8 million people took out Plan 2 loans, with many graduates leaving university with debts exceeding £50,000. 

For a growing number of borrowers, student loans now function less like traditional debt and more like a long-term graduate contribution taken through the tax system. It’s why there have been calls to rebrand student loans as a “graduate tax”. But that doesn’t mean they’re harmless…

How student loans impact mortgage affordability

One of the biggest and yet least discussed impacts of student loans is how they affect mortgage affordability. Mortgage lenders don’t treat student loans like traditional debts; they generally ignore the total balance. But they do factor in your monthly repayments when working out what you could borrow for a mortgage, reducing the income lenders think you have available for a mortgage.

Our analysis suggests that having a student loan can reduce how much you can borrow by around £20,000–£30,000, depending on your loan plan and salary. With the average property hovering around £300,000, losing £20k–£30k of borrowing power could mean:

• The difference between a 2-bed and a 3-bed home
• Needing a larger deposit
• Or simply hearing “computer says no” from the lender

The irony is that many higher-earning graduates can currently secure a mortgage at around 3.7% interest for an 80% loan-to-value mortgage, yet their student loan interest may sit around 6.2%. So we’ve ended up in a slightly bizarre situation where your “soft” student loan debt can cost nearly double the interest of your secured mortgage borrowing. In other words, the loan that’s often described as less serious is actually the more expensive one.

What’s going to happen?

Because of the long-term impact of student loans on graduates’ finances, calls for reform are growing louder. Consumer finance expert Martin Lewis has been among the most vocal critics. In one widely discussed TV moment, he marched onto Good Morning Britain unannounced to contradict the Conservative Leader Kemi Badenoch live on air 👇

Many have called the current system unfair and have argued that by freezing the thresholds, the government is committing a "breach of contract". Many graduates have been protesting the issue, including dressing as sharks to represent the "predatory" nature of the interest rates, calling the current system “a promise that's now been broken.”

Despite the controversy, public opinion remains split. According to YouGov polling on the issue:

• 44% of people think the government should write off some or all student debt
• 41% believe graduates should continue repaying their loans as they do now

All of this has helped to trigger a new inquiry by the Treasury Committee to look into whether the decision to freeze the repayment threshold is unfair to graduates, as well as whether the current repayment terms are reasonable when considered alongside other taxes graduates pay. 

What this means for first-time buyers

Whether reforms happen or not, one thing is clear: Student loans are now a permanent feature of the financial lives of millions of graduates. And when it comes to buying a home, they matter more than many people realise.

While student loan balances don’t appear on your credit file like other debts, the repayments still reduce how much mortgage you can borrow.

This is a system which is quietly influencing the housing market for an entire generation. Because when millions of graduates can borrow £20,000–£30,000 less for a mortgage, the ripple effects reach far beyond university.

For aspiring homeowners, that makes understanding your borrowing power and exploring all your mortgage options more important than ever.