Plan 2 student loan burden hits London hardest

The UK’s Plan 2 graduate loan is pushing younger workers into high repayment rates at a time when disposable income is already being squeezed by tax threshold freezes and higher living costs.

The system has two key issues. First are the very high marginal tax rates, with Plan 2 graduates seeing a marginal rate 9 percentage points higher than everyone else. The second is the high rate of interest, with the principal only being paid off at an annual salary of around £67,500—more than double the average UK salary. The loan is therefore more a career-long tax.

• Repayments exacerbate the UK’s existing cliff-edges that litter the tax system. At its extreme, Plan 2 graduates fall into a 71% marginal tax rate when they earn between £100,000 and £125,000, one of the highest marginal tax rates for someone at this income level in Europe, and higher than any other income tax band. Combined with the loss of childcare benefits at this threshold, many workers actually lose income by getting a wage increase.

• The UK’s poor fiscal position is driving this situation, but targeting young workers is not beneficial for the economy since they have higher marginal rates of consumption and are more likely to invest in stocks and shares. Significant repayment rates also undermine the ability of skilled people to afford housing close to economic activity, pushing them into longer commutes or different jobs entirely, while high marginal tax rates disincentivise career and pay progression.

• The knock-on effect of a large tax burden on young university graduates is a much less dynamic economy, with more limited consumer spending, weaker business investment, and greater aversion to risk. These factors are a critical element for any economy wanting to grow, and certainly not good for a country with near-zero productivity growth for well over a decade.

• All regions of the UK are affected, but London is hit the hardest given its large number of young graduates and the already high cost of living. We estimate around one in six of London’s working-age population are repaying Plan 2 loans, equating to around £750 million in revenues. This elevated exposure to reduced disposable income comes at a time when London has seen real consumer spending fall by 5% between 2019 and 2024, more than in any other region in the UK except the North East.

London has the highest proportion of Plan 2 graduates