In recent months, graduate anger over student loans has become quite loud and harder to ignore. What is often dismissed as generational grumbling from the overeducated and economically naive increasingly looks like a rational response to a system that no longer behaves as advertised.

The issue is not a lack of resilience among young professionals, but the contradiction of asking them to act as rational economic agents while burdening them with a form of debt that is neither rational nor realistically repayable.

At the heart of the UK’s student loans debate lies a contradiction policymakers have never fully resolved. Student loans are loans in name, taxes in practice, and personal debt in the minds of those who repay them. The tension between these 3 identities is no longer abstract. It is starting to crack.

In theory, the post-2012 student loans system functions like clockwork. Repayments are income contingent. Graduates contribute 9 per cent of earnings above a threshold. Those who earn more repay more; those who earn less repay little or nothing. Any remaining balance is written off after 30 years (or 40 years for those graduating this year).

In this telling, the system spreads risk, protects low earners and asks more of those who benefit most.

In practice, Plan 2 operates very differently from its stated intent. Government data shows that nearly three-quarters of borrowers are expected never to repay their loans in full, despite making repayments for much of their working lives.

Institute for Fiscal Studies modelling suggests that graduates must earn over £65,000 a year before repayments consistently exceed interest, placing meaningful debt reduction beyond the reach of most. For the majority, Plan 2 therefore functions less as a loan to be cleared and more as a long-duration graduate surcharge.

This is not a technical oversight but a design choice. The language of debt was retained to satisfy fiscal and accounting conventions, even as the mechanics of repayment came to resemble taxation. The result is a hybrid that combines the least popular features of both: the visibility and anxiety of debt with the inevitability and inflexibility of a tax.

The Behavioural Cost of a Notional Debt

For many graduates, the problem is not what they repay each month, but what they see when they log in (if they can log in at all). Loan balances rise month after month, often faster than repayments can reduce them. In the most recent tax year alone, more than £15bn of interest was added to loan balances, compared with barely £5bn repaid, leaving total debt still rising.

Economically, this should not matter for those who will never clear their balance. Behaviourally, it matters enormously.

Debt signals personal obligation and moral responsibility. It implies failure when balances grow. A tax does not do this. A tax is a contribution to a collective settlement. A debt feels individual, punitive and unresolved.

Graduates are being asked to live with the psychology of debt while being told to interpret it as something else. It is hardly surprising that trust is eroding.

Progressive in Theory, Unequal in Practice

The system was intended to be progressive. In aggregate, it is. But progressivity at the system level can obscure inequalities at the individual level.

Those from wealthier backgrounds are often able to avoid the system entirely by paying fees upfront. High earners, meanwhile, tend to clear their balances relatively quickly, limiting the interest accrued over time.

It is socially mobile, middle-earning graduates who repay the most over their lifetimes. They earn enough to repay for decades but not enough to escape early. This is not how the system is described. But it is how it is experienced.

From Student Finance to Productivity

Faced with high effective marginal tax rates, graduates respond rationally. Responses include increased salary sacrifice, reduced hours, and a reluctance to pursue promotion where additional effort delivers limited net reward. A minority explore early repayment despite the risks, while others consider relocating abroad, even where this does not remove the liability from debt.

These outcomes are frequently framed as disengagement but are better understood as adaptation. When incentives change, behaviour follows.

A system that treats ambition as taxable should not be surprised when ambition is rationed.

The UK has spent years puzzling over stagnant productivity growth. Graduate effort, motivation and retention rarely feature prominently in that debate. Today, student loan repayments interact with taxes and national insurance to create marginal rates that would raise eyebrows in any economics lecture.

When highly skilled workers conclude that additional effort yields diminishing returns, the effects ripple outward: to employers, innovation and the public finances the system is meant to protect.

The irony is difficult to miss. A policy designed to fund investment in human capital may now be discouraging its full deployment.

The Fiscal Illusion Has Faded

It is tempting for universities to treat this discontent as a political issue beyond their remit. That would be a mistake.

The effective privatisation of undergraduate teaching in England has shifted not only costs but expectations. Students now shoulder the overwhelming share of the financial burden. In return, they expect clarity, quality and outcomes.

Where courses deliver weak progression into graduate employment, resentment hardens. Where teaching quality is uneven, debt feels less like an investment and more like an extraction. As graduate anger grows, it will not distinguish neatly between ministers and institutions.

Funding models shape behaviour. The current one rewards recruitment volume more reliably than long-term value. That tension is becoming increasingly visible to those paying for the system.

This outcome was not inevitable. A graduate contribution or graduate tax model was seriously considered in the past. It was rejected not because it was ‘unworkable’, but because loans offered a fiscal illusion, allowing subsidies to be kept off the books while presenting higher education as privately financed.

That illusion has faded. Outstanding student loan debt in England now stands at around £267bn and is forecast to peak at roughly £500bn (in today’s prices) in the late 2040s before large-scale write-offs begin.

Graduates understand that their repayments resemble a tax in all but name. The public understands that a large share of this debt will never be repaid. What remains is the sense of owing something that cannot realistically be cleared.

Restoring confidence in the student finance system does not require consensus on a single solution. It does require confronting uncomfortable truths.

Stability of terms matters. Transparency about likely lifetime repayments matters. So does honesty about who pays, who benefits and who opts out. Above all, it requires recognising that systems dependent on human capital cannot treat those humans as indefinitely adjustable line items.

This is not an argument against higher education, nor against graduates contributing to its cost. It is an argument against a system that obscures reality, erodes trust and then expresses surprise when resentment follows.

Britain has not merely created a cohort with large student loan balances. It has created a generation that feels perpetually indebted financially and psychologically. That is a dangerous foundation on which to build a knowledge economy.

The debate about student loans is no longer about repayment mechanics. It is about the relationship the state wishes to have with its future workforce. And that is a debate the UK government can no longer afford to postpone.