Tories pledge to cut ‘eyewatering’ interest on some student loans

Kemi Badenoch has branded her own party's student finance system 'a scam' and promised to slash interest charges affecting 5.8 million borrowers — a remarkable about-turn on a policy the Conservatives designed just over a decade ago. The timing is particularly pointed, arriving as youth unemployment hits 740,000 and Britain faces a collision of policy failures in how it educates and employs young people. What we're witnessing is a party attempting to disown its own creation whilst offering no coherent vision for the future.

The opposition leader unveiled plans to cap interest on Plan 2 loans at the Retail Prices Index alone, currently 3.8 per cent, stripping away the additional charge of up to three percentage points tied to graduate earnings. For borrowers currently facing rates as high as 6.8 per cent, the savings would be substantial. But the proposal raises an obvious question: why are the architects of this system only now discovering it might be punishing the very 'strivers' they claim to champion?

The subsidy question nobody wants to answer

Plan 2 loans were introduced by the Conservative-Liberal Democrat coalition in 2012, replacing a system where interest was capped at inflation. The new model allowed interest to rise with earnings, ostensibly creating a progressive repayment structure. In practice, middle and higher earners now face compound interest that can outpace their repayments for years.

A source close to shadow Chancellor Mel Stride framed this as a fairness issue: 'People who went to uni, got a decent job and find themselves with sometimes ridiculously high marginal tax rates. They're paying eyewatering interest on their student loans to subsidise others doing low quality degrees who will never repay.'

The student loan system operates as a graduate tax with extra steps — most borrowers will never fully repay, with the government writing off balances after 30 years.

That characterisation deserves scrutiny. Higher earners do pay more, but calling this a 'subsidy' for others misconstrues how the system was designed to function. The real question is whether the state or graduates should bear the cost of higher education, and the Conservatives spent years insisting it should be the latter.

Rachel Reeves now finds herself squeezed. Education Secretary Bridget Phillipson said the government would 'look at' the loans system and wanted 'fairer' arrangements, but offered no commitments. She can hardly ignore the pressure — the National Union of Students and various experts have been demanding reform. But the Chancellor's November Budget already froze the repayment threshold at £29,385 for three years, effectively increasing payments for graduates regardless of interest rates.

Apprenticeships versus degrees: a fragmenting vision

The Conservative proposal includes lifting caps on apprenticeship subsidies and offering employers up to £5,000 for each British 18-to-21-year-old apprentice they hire. Stride championed the policy during his leadership campaign, positioning it as an alternative pathway that gets young people earning earlier. There's economic logic to expanding apprenticeships, particularly in sectors facing skills shortages.

But coupling this with student loan reform creates an incoherent narrative. Are the Tories arguing university is still valuable enough to make fairer, or that young people should bypass it altogether? The mixed messaging suggests a party still working out what it believes about higher education's role in a modern economy.

The employer subsidy also arrives as businesses blame minimum wage increases for making young workers prohibitively expensive. The adult minimum wage will rise 4.1 per cent to £12.71 in April, whilst the 18-to-20-year-old rate jumps 8.5 per cent to £10.85. Labour promised before the election to eliminate age bands entirely, a commitment Keir Starmer says he'll honour despite the unemployment figures.

Young people are simultaneously too expensive to hire and too indebted to thrive once employed.

Whether minimum wage increases genuinely drive youth unemployment remains contested. Many economists argue the correlation is weak, pointing instead to cyclical factors, skills mismatches, and employers' preference for experienced workers during uncertain times. But the political narrative has taken hold.

What comes next

The Conservatives are betting they can recast themselves as defenders of strivers without being held accountable for creating the system they now condemn. Labour will certainly remind voters who introduced Plan 2 at every opportunity. Whether that lands depends on how successfully the opposition can argue it learned from its mistakes — and whether Reeves offers any meaningful alternative.

What's clear is that the policy landscape around young workers has become a mess of contradictory pressures. Businesses want lower employment costs. Graduates want manageable debt. The Treasury needs revenue. Apprenticeships need funding. And 740,000 young people need jobs.

Badenoch's student loan proposal might ease some pressure, assuming she ever gets the chance to implement it. But without a coherent answer to how Britain trains, employs, and compensates its young workforce, we're simply rearranging the deck chairs on a generational policy failure that now spans multiple governments.