Thousands of graduates are caught in a student loan ‘debt trap’ where the interest being added dwarfs any headway they make. Lucy O’Brien was shocked when she discovered how high interest rates were leading to ballooning debt.
“Like many of my drowning-in-debt ‘plan 2’ student loan comrades, I didn’t think twice about diving straight into a master’s degree, bright-eyed and fresh out of my undergraduate course in 2021,” O’Brien said. “To say I was naive to the additional financial burden would be an understatement. Even less did I think that, four years after finishing my master’s, I’d be using the savings money I’ve built up – which I’d planned to put towards a deposit to buy my first property – to pay back my postgraduate loan in full. And yet here I am.”
This month, in response to the row over millions of graduates trapped by ballooning debts, the government announced a 6% cap on interest rates for plan 2 undergraduate and “plan 3” postgraduate loan repayments from 1 September this year. This will provide slight relief to higher earners – those on salaries of £52,885 or more – who are now paying the maximum interest rate of 6.2% on their undergraduate loan, as well as a further 6.2% on postgraduate loan repayments.
However, it was confirmed this week that most plan 2 graduates will still see their interest rate rise in September because of the way it is linked to inflation. In simple terms, the plan 2 people currently pay between 3.2% and 6.2%, but this will rise to between 4.1% and 6%.
The announcement of an interest rate cap came after months of mounting outrage from thousands of graduates like O’Brien, who, despite having consistent work and starting to make sizeable monthly repayments since graduating, are caught in a student loan “debt trap” where the interest being added dwarfs any headway we make.
“In the wake of the loans furore, I’m sure I wasn’t the only graduate that – perhaps for the first time – logged on to the Student Finance portal to check my remaining debt balance. When I did, I was shocked to see that the amount I still had to repay had risen from my initial total borrowing of £51,529 to £65,879.”
Her master’s loan, in particular, stood out – perhaps because she thought that after three years of consistent repayments, she would have at least made a dent in this smaller loan. Evidently not: though she had initially borrowed £11,570 and has repaid approximately £2,000, she still owed £12,737.
O’Brien calculated that if she continued to pay her master’s loan off monthly, assuming she stayed on the same salary and the cap remained at 6%, it would take her until mid-2034 to clear it, and she would hand over a total of approximately £7,000 in interest. Essentially, her master’s degree would end up costing her more than £18,500.
So, knowing that her undergraduate debt was simply too big to tackle, she decided instead to start clearing her postgraduate loan. At the beginning of the year, she withdrew some of her savings originally put away for a house deposit and made a lump-sum payment of £6,000 (about half of the current total). She is planning to do the same thing at the end of 2026, so that by this time next year she should be completely rid of her postgraduate loan.
“You might be thinking: is it worth it? The short answer is yes. There’s a common theme among us graduates: out of sight, out of mind. Lots of us, myself included, tend to view our ever-increasing debt as simply a fact of life, safe in the knowledge that in 30 years it will be written off anyway. But the reality is that it’s crippling us financially. As the cost of living and rising inflation continue to make life for young people in Britain increasingly difficult, student loan repayments burden our pay cheques every month yet continue to make no tangible dent on our inflating debt.”
The worst part, she says, is that she is in a better position than most. She took out the minimum amount of maintenance loan (as well as the standard tuition fee loans) throughout her undergraduate degree after receiving an academic scholarship, and moved back to her family home to work alongside studying her MA in London. She has many friends that, soon enough if not already, will be more than £100,000 in student loan debt.
So, while she may have delayed buying a house for another year, it makes sense in the long term. Not only will she be saving thousands in interest, it also means her salary will get a healthy boost once free from the monthly postgrad loan deduction – money which she can then put back towards building a deposit. “Hey, if nothing else, at least it will help my credit score.”
