Student loans have become high profile over recent months with many questioning how ‘fair’ they are, particularly Plan 2 loans. While the UK Government stopped issuing them in England in 2023, undergraduates in Wales are still taking out Plan 2 loans.
How do student loans work?
Student Finance Wales is the body responsible for assessing students’ applications for funding and determining eligibility on behalf of the Welsh Government. The Student Loans Company then pays the loans and grants to institutions and students, and manages students’ accounts including handling repayments through the tax system.
How and when students repay their loans will depend on when they started their course and their plan type. In Wales, there are three repayment plans:
- Plan 1: Students who started their course before 1 September 2012;
- Plan 2: Students who started an undergraduate course on or after 1 September 2012; and
- Postgraduate / Plan 3: Students who started a postgraduate Master’s or Doctoral course on or after 1 August 2018.
There are different repayment plans across the UK. Students who started undergraduate courses in England between 1 September 2012 and 31 July 2023 were on Plan 2; since then, new students are on Plan 5.
Income thresholds and interest rates
The Welsh Government sets repayment thresholds and interest rates for Welsh students.
Repayment thresholds directly affect students as it’s the amount they can earn before paying their loan back. Similar to income tax, freezes to the thresholds draws more students into making repayments and increases money going to HM Treasury.
Interest is charged on all loan plans from the day of the first payment to the student or institution until the student loan is repaid in full or cancelled. Since repayments are income dependent, changes to interest rates do not affect the amount of student loan repayments, only the total value of the loan balance.
Plan 2 loans in Wales
The interest rates charged for Plan 2 loans while students are studying is normally the Retail Price Index (RPI) +3%. However, once students are due to repay, the interest rate charged is variable and income dependent. In 2026/27, those earning:
- £29,385 or less are charged at the RPI;
- between £29,385 and £52,885 are charged on a sliding scale from RPI to RPI +3%; and
- more than £52,885 are normally charged RPI +3%.
The Welsh Government is required to ensure the student loan interest rate is no higher than the average interest charged on commercial loans (the prevailing market rate). When interest rates increased after the Covid pandemic, the Welsh Government introduced an interest rate cap to adhere to those requirements.
When a student’s loan is due for repayment, in the April after they leave or finish their course, they will repay 9% of their income over the threshold (currently £29,385 for 2026/27) with repayments collected by HMRC through the tax system. If a student’s income is less than the repayment threshold, they will not make repayments.
Any Plan 2 loan plus interest remaining 30 years after the student is due to start making repayments will be cancelled.
Future changes
The UK Government increased the Plan 2 repayment threshold in England to £29,385 for 2026-27 and said it will be frozen at that level for three years from April 2027. While the repayment threshold in Wales increased in line with England for 2026-27, the previous Welsh Government said it “had no intention of freezing the thresholds and following England”. However, this will be a decision for the new Welsh Government.
In April 2026, the UK Government announced it’ll be capping the maximum interest rate on Plan 2 loans from 1 September 2026 at 6%. The previous Welsh Government “agreed in principle to the UK Government’s proposal to cap interest rates” but said “any formal decision […] is a matter for the next Welsh Government”.
How does the Welsh Government budget for student finance?
While it’s for the Welsh Government to determine how to allocate its resources, HM Treasury (HMT) operates controls in respect of the funding for the student finance system in Wales.
HMT fully funds the Welsh Government’s allocation for new student loans providing the Welsh student finance arrangements (and the cost of them) are broadly comparable with those in England. If the Welsh Government wishes to offer a more generous scheme or when HMT concludes the offer in Wales costs more than that in England, the Welsh Government has to fund the excess cost from its existing budget, therefore reducing the amount it has to spend on other devolved policy areas.
HMT also allocates ring-fenced (meaning the Welsh Government is not able to use them for anything else) non-cash budgets for:
- the value of the newly issued loans the Welsh Government does not expect students to repay. This is known as the Resource Accounting and Budgeting or ‘RAB’ charge, the allocation for which HMT determines through the Barnett formula; and
- the annual change in the value of the loans issued in previous years. This is known as the ‘stock charge’, with HMT covering costs “providing they are within a reasonable range”.
The new student loans valuation model
Putting a value on the Welsh Government’s student loan asset, which is the amount students are expected to pay back, requires complex modelling.
At 31 March 2025, the previous Welsh Government valued its student loan asset at £8.9bn. However, in the following financial year, it implemented the new model used by the UK Government to estimate the value of the Welsh Government’s student loan asset. This showed students’ future earnings are likely to be lower, reducing the amount they will pay back compared to the previous model and significantly increasing the stock charge for the year.
HMT allocated additional non-cash funding of £2.4bn to the previous Welsh Government for the increase in the estimated stock charge in 2025-26.
The end of HM Treasury fully funding Welsh student finance?
To date, HMT has fully funded student loans on the basis that costs in Wales are broadly comparable to England. In January 2026, the previous Welsh Government said operating within HMT limits “present[s] a challenge for ongoing student support in Wales”.
In March 2026, the previous Welsh Government told the Sixth Senedd’s Finance Committee, in recent years, HMT had taken a “closer oversight of this policy issue” and had “tightened up the rules”. It noted:
[…] the thing for us to watch in the coming months is whether our system is more generous than systems elsewhere, and when it starts to cost us real money as well.
Also in March 2026, the previous Welsh Government stated Wales was “now operating close” to the HMT comparability position for the issue of new student loans.
The previous Welsh Government noted its RAB charge for 2025-26 may exceed what HMT will cover and, subject to confirming final outturn, the Welsh Government may be required to meet £7.7m from its resources for day-to-day spending.
What does this mean for the new Welsh Government?
As set out, the Welsh Government has to operate its student finance system within distinct controls for HMT to fully fund it and Wales’ student finance arrangement is close to breaching these controls. It will present a challenge for the new Welsh Government in meeting the excess should HMT concludes it has done so.
Whether the current arrangements, which the previous Welsh Government described as the “most generous student financial support package in the UK”, are financially sustainable going forward is to be determined. The new Welsh Government will need to make decisions about the long term plan for student finance.
Article by Lucy Yarham and Joanne McCarthy, Senedd Research, Welsh Parliament
