At long last, the student loan system is being debated seriously. It should be. Few policies impose marginal tax rates that politicians would tolerate anywhere else: 37% on incomes over £25,000, 51% over £50,270, and 71% over £100,000, before you even factor in interest and postgraduate add-ons.
The Conservatives have proposed scrapping interest rates of up to 6.2% on Plan 2 loans, capping them at RPI. On paper, that sounds like reform. In practice, it mainly benefits higher earners—those who actually expect to repay their loans. As Martin Lewis pointed out when he ambushed Kemi Badenoch on Good Morning Britain, raising the repayment threshold would be far more redistributive.
But that misses the deeper point. The problem with student loans isn’t just distribution. It’s structural.
The original trick
Before student loans, higher education was funded directly through government spending. Grants and tuition costs sat within departmental budgets and counted towards the deficit.
Loans changed that.
Because they are classified as financial assets, student loans do not count as government spending when issued. They don’t increase the deficit. They do, however, increase government debt. The expectation—at least originally—was that they would be repaid in full, with any losses only appearing later if borrowers defaulted.
This isn’t a loophole or a scandal. It’s how national accounts work, and the UK follows international standards. But it does create an incentive: shifting spending into loans makes the deficit look smaller, even if the underlying economic reality hasn’t changed.
In 1990, when the Student Loans Company was created, the sums were trivial—around £684 million. Moving that off the books made a marginal difference to the government’s fiscal position.
Expansion without visibility
What began as a marginal accounting shift became something much larger.
Labour expanded higher education while keeping tight control over public spending. The 1998 reforms introduced tuition fees and replaced most maintenance grants with loans. By 2005/06, annual lending had reached £2.79 billion.
The real inflection point came after the financial crisis. The Browne Review paved the way for fees of £9,000 a year. From that point on, the system changed character. Students were no longer borrowing modest sums—they were financing their entire education.
By 2024–25, the Student Loans Company was issuing £23.8 billion a year.
At that scale, the accounting distinction matters. What would once have been direct public spending is now recorded as loans. It still adds to government debt, but it doesn’t appear in the deficit—the number that dominates political debate.
The system breaks down
The problem is that student loans are not normal loans.
They are conditional. Repayments depend on income, and large numbers of borrowers will never repay in full. As loan sizes have grown, so has the gap between what is lent and what will realistically be recovered.
This is where the accounting starts to unravel.
When loans are not repaid as expected, the shortfall eventually feeds through into the deficit. The higher the write-offs, the larger the future fiscal cost. In effect, today’s “off-balance-sheet” spending becomes tomorrow’s deficit.
Even the Treasury Select Committee now admits uncertainty about how these loans should be valued. There is no clear international standard for accounting for loans that are unlikely ever to be repaid in full.
This matters. Changes in how the student loan book is valued can shift both the size of the national debt and the reported deficit.
What we don’t know
Let’s pause on that.
After years of political focus on reducing the deficit, we are dealing with a system where:
- a large share of higher education spending is hidden as loans
- the true value of those loans is uncertain
- and the future fiscal cost is, at best, an estimate
As the Treasury Select Committee put it:
“There is no effective control over the increasing fiscal cost of the student loan regime.”
Outstanding student loan debt in England has now passed £266 billion, and over £292 billion across the UK.
At some point, that will have to be recognised.
The inevitable conclusion
Student loans were never really loans in the conventional sense. They were a way of funding higher education without it showing up in the deficit.
That worked when the numbers were small.
It doesn’t work now.
What began as a technical accounting treatment has become a central pillar of how the UK funds universities—and a growing source of fiscal uncertainty. The idea that this can continue indefinitely, without a reckoning, is hard to sustain.
Eventually, the cost will have to be acknowledged for what it is: public spending by another name.