Graduates struggling with ballooning student loan debts are increasingly raiding their house deposit savings to pay off postgraduate loans, in a stark illustration of how the system’s compounding interest can leave borrowers trapped for years. One such graduate, who completed a master’s degree in 2021, has withdrawn £6,000 from money earmarked for a first home to make a lump-sum payment towards a postgraduate loan that, despite consistent repayments, has actually grown in value.
The graduate initially borrowed £51,529 for an undergraduate degree and a master’s course. When they checked their balance recently, the total had swollen to £65,879. The postgraduate loan – originally £11,570 – stood at £12,737 despite £2,000 already being repaid. By their own calculations, continuing monthly repayments at their current salary would take until mid-2034 to clear the master’s loan, with approximately £7,000 paid in interest alone, meaning the qualification would end up costing more than £18,500. Determined to avoid that, they made a £6,000 lump sum from savings this year and plan a further payment by the end of 2026 to wipe out the postgraduate debt entirely, even if it means delaying a property purchase.
The experience is far from unusual. Data from the Student Loans Company shows that the total value of outstanding student loans in England reached £267 billion by March 2025, with forecasts suggesting it could hit around £500 billion by the late 2040s. The average debt for students finishing their courses in 2024 was £53,000 – a 10% increase in a year. Nearly three million UK graduates now owe more than £50,000, and more than 150,000 individuals have debts exceeding £100,000, with one borrower owing a record £314,256. Crucially, 76% of loans have continued to grow since entering repayment, with fewer than a quarter shrinking. An estimated 70% of borrowers will never fully repay their loans.
How the loan system works – and why interest piles up
The mechanics of interest accrual are central to the problem. The UK operates multiple loan plans depending on when and where a course was started. Plan 2 loans cover undergraduate degrees and PGCEs begun after September 2012 in England (and between September 2012 and July 2023 in Wales). Plan 3 loans are specifically for postgraduate master’s or doctoral courses in England and Wales.
Interest rates for both Plan 2 and Plan 3 are calculated using the Retail Prices Index (RPI) plus an additional percentage. While a borrower is still studying, the rate is RPI plus 3%. After graduation, it varies by income: for those earning less than a certain threshold the rate can drop to RPI alone, while higher earners pay up to RPI plus 3%. Because RPI has been running high in recent years, many graduates have seen their loan balances increase even as they make regular repayments. For Plan 2 borrowers, the maximum rate has been 6.2% for those on salaries of £52,885 or more – a rate applied to both undergraduate and postgraduate loans.
Repayments are collected automatically through PAYE. For Plan 2 loans, graduates pay 9% of their income above £29,385 per year (as of April 2026). For Plan 3 postgraduate loans, the threshold is £21,000 per year, with repayments set at 6% of income above that level. Loans are written off after 30 years for those taken out before September 2023, and after 40 years for loans started from that date onwards.
The new interest rate cap – temporary relief but not a fix
In response to mounting anger over graduates trapped in what campaigners call a “debt trap”, the government announced in April 2026 that it would cap interest rates at 6% for Plan 2 and Plan 3 loans from 1 September 2026 for the 2026/27 academic year. The cap is described as a temporary measure to protect borrowers from potential inflation increases caused by global economic shocks.
However, the cap will not prevent most Plan 2 graduates from seeing their interest rates rise. Because the rate is linked to inflation, the current band of 3.2% to 6.2% will shift to between 4.1% and 6% from September. Higher earners on salaries above £52,885 will benefit from the 6% ceiling, but lower earners will still pay more than before. Campaigning groups and some MPs have criticised the measure as insufficient, arguing it does not address the fundamental unfairness of a system where 70% of borrowers will never repay their loans in full.
Other government actions include freezing the Plan 2 repayment threshold at £29,385 until 2030 – a move that means more graduates will repay larger amounts as wages rise – and reintroducing targeted, means-tested maintenance grants from the 2028/29 academic year. Tuition fees for standard full-time undergraduate courses will increase by 3.1% to £9,535 per year from 2025.
The impact on homeownership and financial stability
The cumulative effect of student debt is being felt most acutely in the housing market. Research indicates that aspiring first-time buyers with outstanding student loans typically save around £2,000 less per year towards a deposit compared to those without such debts. Some 41% of people with student loans report that repayments make it harder to save for a home. Lenders factor monthly loan repayments into debt-to-income calculations, potentially cutting borrowing power by £20,000 to £30,000. A 2021 study found that graduates with student loans were less likely to own a home by age 25.
Beyond homeownership, 44% of individuals with student loans say the debt makes it harder to be financially stable overall. For the graduate in this case, the decision to use house deposit savings to clear the postgraduate loan is a calculated one. They estimate that once the postgrad debt is gone, their salary will receive a boost of several hundred pounds a month – money they can then redirect back into building a deposit. As they put it, the move saves thousands in interest and, while delaying a house purchase by a year, makes better long-term financial sense than continuing to watch a loan grow despite monthly payments.
The maximum postgraduate master’s loan in England for the 2024/25 academic year is £12,471, and for doctoral courses it is £29,390, though average master’s fees are around £8,740. Private postgraduate loans from banks are also available, often with different interest structures and higher borrowing limits.
