by Rob Cuthbert

In January and February the mainstream media were full of stories about the unfairness of student loans and the burdens on graduates facing huge debts and effective tax rates of more than 50%. They cut through in a way that the long-running stories about universities’ financial problems had not, and even dominated Parliamentary questions to the Prime Minister (PMQs) on 25 February 2026. But student loan repayments and universities’ financial problems are two sides of the same coin – how to finance mass higher education. The political debate about student loans is a case study in how almost everyone who didn’t know enough got almost everything wrong at first, until more realism gradually emerged.

Under Labour governments from 1997 there was a heated but, by comparison, measured debate about the costs of higher education, and who should pay for it. As HE participation rates soared from 10% towards 40-50% the international consensus was that it was reasonable for students or graduates to bear some of the cost. Higher education benefited society but also individuals who enjoyed a ‘graduate premium’ of higher lifelong earnings. Nevertheless, when the £1000 undergraduate tuition fee was raised to £3000 in 2003 it nearly brought down the Labour government. That probably represented about half of the total cost at that time. Students were of course vehemently opposed to fees, but for some in HE it felt about right to share the costs equally between students and general taxation.

Demand for HE continued to rise but total costs were controlled because government still determined total student numbers. Then came the Coalition government of 2011 with its determination to make higher education a market. The Liberal Democrats reversed their pre-election pledge to abolish student fees, instead agreeing as part of the coalition to triple fees to £9000. And government abolished its control on total student numbers. Universities Minister David Willetts claimed that student choice would “drive up quality”, but he, almost alone, expected a spectrum of fees from £6000-9000 to emerge. Everyone else realised that price would be the loudest signal of quality, and almost every university went for £9000.

The £9000 fee probably covered most of the costs of undergraduate tuition, although some grant funding remained for specialist high-cost courses, and Oxbridge complained that for them £13000 was the break-even figure. £9000 became the highest nationwide tuition fee in the world, and England still enjoys that dubious world-leading position. To keep higher education accessible to all, in theory at least, new arrangements were needed to make HE affordable at the point of delivery, with the cost being partly paid by students after graduation.

Under the new student loan system graduates would start to make repayments once their salary was above a specified threshold. Their debt would increase at a specified rate additional to the Retail Prices Index (RPI). The total repayments each month were capped, so most graduates would never repay their total debt, but any remaining debt was wiped out after 30 years. The explicit intention was that both fees and salary thresholds would rise with inflation.

This means that student loans are not like commercial loans. The system was never designed to get all the money back. It was designed to be progressive, like income tax, so that among graduates “those with the broadest shoulders”, as the Prime Minister likes to say, should bear a greater share of the repayment burden. In 2012 it was intended that the system should deliver about 72% of the total cost in repayments. The unmet cost (government subsidy) was known as the Resource Accounting and Budgeting (RAB) charge.

Almost immediately the RAB charge began to rise above its planned level, and the government soon found it necessary to restrict enrolments in many new ‘challenger’ institutions, which were providing courses of debatable quality, mostly in business and management, mostly in London. Far from driving up quality, student choice seemed to be driving it down. But these problems paled into insignificance as the economy continued on its path of sluggish low growth. To make things worse, government had to abandon a “fiscal illusion” in government accounting, as the Office for National Statistics forced a justified change which put more costs onto current balance sheets rather than allowing them to be deferred for many years. For a while, the fact that interest rates were near zero concealed the punitive possibilities of debt levels and loan repayments, but then government – facing budgetary pressure – decided to freeze thresholds and change repayment terms. (Jim Dickinson’s Wonkhe blog on 2 February 2026 was a detailed explanation of how we got to where we are). Interest rates rose to 3-4% but government persisted with the use of RPI + 3% as the loan interest rate, even though for almost every other purpose it used the lower figure of CPI (consumer prices index). The current outcry on loans became inevitable; indeed, it had even been predicted by Nick Hillman, one of the architects of the loan system, who wrote in a 2014 Guardian article: “… come with me to the election of 2030. Those who began university when fees went up to £9,000 in 2012 will be in their mid-thirties by then. That is the average age of a first-time homebuyer and the typical age for female graduates to have their first child. By then, there will be millions of voters who owe large sums to the Student Loans Company but who need money for nappies and toys, not to mention childcare and mortgages. So, however reasonable student loans look on paper now, the graduates of tomorrow could end up a powerful electoral force.”

Meanwhile, some of the graduates of yesterday were quick to ride the coat-tails of the loans debate and cry “more means worse”, even as all the more successful world economies continue in the opposite direction. Often mentioned but never identified, ‘Mickey Mouse courses’ also took a supposed share of the blame, despite expert commentators like David Kernohan of Wonkhe pointing out the extreme difficulty of identifying them in ways that government or the regulator could operationalise. The Labour government adjusted its stance on exactly what the country needs with some vaguely quantified assertions about skills in its White Paper, and former Skills Minister Robert Halfon popped up on Times Radio on 14 February 2026 to argue, as he always did, for more apprenticeships. Acknowledging employers’ decades-long unwillingness to pay for training, he suggested they should be ‘incentivised’ with £1billion of public money. But even with public funding for employers’ costs, vocational training apprenticeships will mostly remain a great idea ‘for other people’s children’, as Alison Wolf once witheringly put it. Conservative leader Kemi Badenoch got the kind of publicity she probably hoped for as she proposed in an ITV interview to help Plan 2 graduates by reducing interest rates, even as personal finance guru Martin Lewis pointed out this would only help the richest graduates, and the way to help people was by unfreezing the salary thresholds at which the higher repayments kicked in. He apologised for gatecrashing the interview, but he was quite right, and understandably frustrated. Badenoch said this could be afforded by removing 100,000 students on ‘low quality’ courses and using the consequent savings. Shadow Education Secretary Laura Trott, under pressure from the BBC’s Laura Kuenssberg, waxed lyrical about LEO data on graduate salaries and suggested that Creative Arts courses were low quality and should feature in the 100,000 reduction. She refused to say that university closures could be ruled out, but there was, of course, no coherent plan for the supposed reductions and their effects on local economies, especially in regions where salaries are lower.

Conservative leader Kemi Badenoch was unabashed and led with the topic at PMQs on 25 February 2026 and Jim Dickinson blogged the same day for Wonkhe, pointing out the problems with most of the interventions from backbenchers of all parties, and noting that things will soon get worse with barely-noticed measures affecting postgraduate student support in the previous budget. Prime Minister Keir Starmer committed to a review of the loans problem, but in Times Higher Education on 27 February 2026 Helen Packer had experts queueing up to point out that: “Quick tweaks to the terms of English student loans are unlikely to satisfy disgruntled graduates and may conflict with wider plans to reform post-16 education.”

The major problems with HE finance have still not yet had equivalent mainstream recognition. In recent years the tuition fee income of universities fell from £12billion to £10billion simply through inflation and the freezing of tuition fees. 40 % of universities are reporting deficits and the majority are making staff redundant. Government has unfrozen tuition fees but then hit universities with a levy on international student fees which more than wiped out the extra income from fee increases. Visa restrictions have also hit international student enrolment and severely reduced some universities’ opportunity to compensate for the losses on home students. In 2011 Universities UK hoped that accepting the £9000 fee would rescue the HE sector from the coming austerity, but the rescue was short-lived, as fees failed to rise with inflation. Now another government faces the challenge of finding a long-term sustainable solution to the problem of funding higher education. It seems far from the top of the agenda for the embattled Starmer administration, but the media outrage over student loans might push it higher.

Successive cohorts of students have experienced various Plans for repayment. The main problem is Plan 2, affecting students who started their courses from 2012-2013 to 2022-2023. The numbers rapidly become hugely confusing, and some commentators fail to recognise even such basic issues as the need to ensure that all costs and prices are on the same base. But almost all agree that Plan 2 is unfair and should be changed.

American students have more orthodox commercial loans to pay for their tuition and in the USA the growing scale of student debt also became a major political problem. However Americans are much more accustomed to the high costs of HE: the culture encourages parents to save from birth to pay for tuition, and the taxation system rewards both savings and loan repayments. In addition, a ‘borrower defense’ program, created in 1994, allows students to get loans cancelled if they are misled by their colleges about their future employment prospects. The Obama administration began to penalise institutions, mostly for-profit institutions, which did not adequately prepare students for gainful employment which would enable them to repay their loans. Student debt rose to about $1.6trillion; by January 2025 President Biden had forgiven $183.6billion of debt, before President Trump set out to turn the clock back. In the USA the ‘graduate premium’, the advantage for graduates who earn on average higher pay than non-graduates, has continued to rise despite continuing HE expansion, whereas in the UK, almost uniquely, the premium has declined. This suggests, as Jim Dickinson has argued on Wonkhe, that the problem is one of supply rather than demand – employers will not or cannot pay more in the sluggish UK economy. Graeme Atherton (West London) pointed out in Times Higher Education on 26 February 2026 that despite Trump’s changes the US system is still more progressive than Plan 2. John Burn-Murdoch had a telling chart in his Financial Times article on 16 February 2026, ‘Is higher education still worth it is the wrong question’, showing that in the UK the graduate premium had decreased from 1997-2022 as HE numbers increased, contrary to the trends in the USA, Canada, Netherlands, France and Spain.

The problem of financing UK HE remains unsolved and the clamour of vested interests has become almost deafening. The main architect of the fees regime, David Willetts, who wrote a book about intergenerational unfairness, tried hard on Conservative Home to blame someone else while defending progressive expansion rather than reduction in HE student numbers. Alternative solutions abound, but have not yet penetrated the mainstream media debate about HE policy. Nick Barr (LSE), a longstanding expert commentator on HE finance, wrote in July 2023 about ‘A fairer way to finance tertiary education’.  There was detailed and expert analysis in Financial modelling by London Economics in March 2024. In September 2024 Tim Leunig, a former Chief Analyst at the Department for Education wrote a HEPI blog on ‘Undergraduate fees revisited’ alongside his HEPI debate paper, which promised that “Highest earners would pay the most, as is appropriate in a social insurance scheme”. The Higher Education Policy Institute (HEPI) in April 2025 published a report asking ‘How should undergraduate degrees be funded? A collection of essays’. Mike Larkin (emeritus, Queen’s University Belfast) posted on his Total Equality for Students blog on 13 January 2025 a detailed and plausible set of proposals for reform of the present system, summarising many of the attempts to initiate debate.

Yet it is only now that the financing of HE might creep into the mainstream debate, entering through the back door of unfair student loan repayments and threatening to deliver results that may help some graduates but damage higher education even more. Nick Hillman has argued persuasively that of the three main proposed solutions to the student loans furore, one is unwise, one unaffordable, one unpalatable, and all are unfair. Nevertheless, something must be done. Former Director of Fair Access John Blake, interviewed by Nicola Woolcock in The Times on 4 February 2026, said;“…  a system that feels so suffocating to so many is fundamentally broken, no matter how many graphs about average graduate salaries we make…. I think we may need to move to a formal graduate tax. There are no popular options here, it’s not just people saying I’m in debt and it’s going up every year. Even if the system computes, it has a sense of being ridiculous when you’re in it. This system has run out of road.” Blake is Director of the new think tank The Post-18 Project. ‘The walls are closing in on our doomed student loans system’, as Jim Dickinson wrote for Wonkhe on 11 February 2026.

When it started, the student loan system was perhaps financially logical, if you accepted its progressive premise of redistribution. Repeated government tinkering in the face of extreme budgetary pressure, especially the freezing of thresholds, made it successively more and more unfair, and has now exposed the underlying psychological and emotional illogicality. The oppressive psychological impact of the loan system on graduates facing a difficult job market makes it unsustainable. So what is to be done?

If  higher education is free, poor people who don’t go to university pay for the education of rich people who do. If students pay all the cost of their higher education, as is now being widely proposed, then everyone suffers because economic growth and incentives are diminished. We need to find a halfway house which shares the cost of higher education between graduates and the wider society which benefits from HE. The immediate challenge is to find a sustainable way to preserve the progressive and redistributive nature of student finance, which is not experienced by successive cohorts of graduates as oppressive and demotivating.

The Labour government has accepted the need for a comprehensive review of how HE should be financed, but it remains a work in progress, promised but not near the top of the agenda. Short-term budget fixes like the international students’ fees levy suggest that there is limited sympathy in government for the financial plight of many universities. Previous governments of various stripes have resorted to bipartisan national inquiries (Dearing, Browne) which straddle general elections to reduce their electoral risk, and such a device cannot be ruled out this time. The danger is that, under the short-term pressure of finding a fix for the student loans problem, government will lurch into a ‘solution’ with possibly massive collateral damage to the whole HE sector, and to local economies. Government is desperate not to increase its spending and borrowing any further, and in any case has other higher priorities than HE. But a solution to student loan repayments which requires HE to contain the cost of improving the system may force the closure of a significant number of universities, with long-term and possibly irreparable damage to their local communities and economies – probably mostly in the Midlands and the North, not London and the South East. Brian Bell (King’s College London) has just been appointed principal adviser to both the PM and the Chancellor on macroeconomics and fiscal policy. He spoke at an LSE event in February about migration, where he said, discouragingly: “I’m sure we’d all like for there to be a complete rethinking of university financing, and perhaps even the university model across the UK – perhaps we shouldn’t all be teaching three-year degrees in X and Y – perhaps we should have different universities doing different things. But I see no realistic prospect of that happening.” These are hard questions with no easy answers, but too many people are getting too many things wrong about both the costs and the benefits of higher education. Let us at least start by understanding what the problem is.

Rob Cuthbert is editor of SRHE News and the SRHE Blog, Emeritus Professor of Higher Education Management, University of the West of England and Joint Managing Partner, Practical Academics. Email rob.cuthbert@uwe.ac.uk. Twitter/X @RobCuthbert. Bluesky @robcuthbert22.bsky.social.