Student Loan Threshold Freeze Explained — How It Affects You

What Is a Threshold Freeze?

Under normal circumstances, student loan repayment thresholds rise each year in line with some measure of inflation — typically RPI for Plan 1 and Plan 4, or average earnings for Plan 2. This means the salary at which you start repaying your student loan increases roughly in step with wages, keeping the real burden of repayments approximately constant over time. A threshold freeze breaks this link: the threshold stays at the same cash figure while everything else — your wages, the cost of living, average earnings — continues to rise.

In practical terms, a freeze means you start paying more in student loan repayments each year even if your real standard of living has not improved. If your salary rises by 3% to keep pace with inflation but the threshold stays the same, the gap between your salary and the threshold widens — and since you pay 9% of that gap, your repayments increase. This effect is cumulative: each year of a freeze adds another layer of additional repayments on top of the previous year's increase.

The mechanism is sometimes called "fiscal drag" — a term borrowed from income tax policy, where frozen tax thresholds cause more people to pay higher rates of tax as wages rise. The principle is identical for student loans. The threshold freeze is politically attractive because it raises additional revenue from graduates without any visible change to the repayment system — no new legislation, no change to the 9% rate, no headline announcement. Most borrowers do not notice the freeze directly; they simply see their student loan deductions increasing in line with their salary increases, which feels natural even though the threshold freeze is amplifying the effect.

The Concept of Fiscal Drag

Fiscal drag deserves a deeper explanation because it is the core mechanism through which threshold freezes cost borrowers money. Imagine the student loan system as a sliding scale: the threshold is the zero point, and your repayments are measured as a percentage of how far your salary sits above that zero point. If the zero point rises with your salary, the distance stays the same and your repayments stay the same in real terms. If the zero point is frozen, the distance grows every year, and your repayments grow correspondingly.

To illustrate with numbers: suppose you earn £30,000 and the threshold is £27,295. The gap is £2,705, and you repay 9% of that, which is £243.45 per year. Now suppose your salary rises to £30,900 the next year (a 3% increase) but the threshold stays at £27,295. The gap has widened to £3,605, and your repayments jump to £324.45 per year — an increase of £81 per year, or 33%. Your salary rose by 3%, but your student loan repayments rose by 33%. This disproportionate impact is the essence of fiscal drag.

The effect is most pronounced for those earning just above the threshold, where the percentage increase in repayments is largest relative to the absolute amounts. For higher earners, the absolute cost is the same, but represents a smaller percentage change. Regardless of income level, every borrower above the threshold loses an extra 9% of whatever the threshold would have risen by — in this example, 9% of the approximately £820 that a 3% inflation increase would have added to the threshold, which equals approximately £74 per year. For a thorough understanding of how repayments are calculated, see our guide on how student loan repayments work.

Plan 1 Threshold Freeze History

Plan 1 experienced one of the earliest and most consequential threshold freezes. From 2012/13 through 2015/16, the Plan 1 threshold was frozen at £16,910, then at £17,335, and effectively kept at roughly the same level for several years with minimal adjustments. The threshold in 2012/13 was £15,795 and reached £17,495 by 2016/17 — an increase of just £1,700 over four years during a period when cumulative inflation was approximately 10-12%.

The more dramatic freeze occurred after 2020/21, when the Plan 1 threshold sat at £19,390. It then increased only modestly to £19,895 in 2021/22 and £20,195 in 2022/23 — increases well below the rate of inflation. The government then implemented substantial catch-up increases, raising the threshold sharply to £22,015 in 2023/24 and then to £24,990 in 2024/25. The expected 2026/27 figure of £26,900 continues this upward trajectory.

For Plan 1 borrowers, the freeze period from 2012 to roughly 2022 had a meaningful impact. Consider a graduate who earned £25,000 in 2012. Had the Plan 1 threshold risen with RPI from its 2012 level of approximately £16,000, it might have reached approximately £20,000 by 2020. Instead, it was roughly £19,390 — a difference of approximately £600, costing the borrower an extra £54 per year in repayments. Over the eight-year period, cumulative additional repayments from the freeze amounted to several hundred pounds. While less dramatic than the Plan 2 freeze, it was still a meaningful transfer from borrowers to the government.

Plan 2 Threshold Freeze — The Big One

The Plan 2 threshold freeze is by far the most impactful, affecting the largest group of current borrowers — approximately 4 million graduates. The Plan 2 threshold was frozen at £27,295 from the 2021/22 tax year and remained at that level through 2024/25 — four consecutive tax years at the same figure.

When Plan 2 was introduced in 2012, the threshold was set at £21,000 with a government commitment to increase it in line with average earnings. For several years, this commitment was honoured, with the threshold rising to £25,000 in 2018/19, £25,725 in 2019/20, £26,575 in 2020/21, and £27,295 in 2021/22. Then the freeze was imposed as part of a broader fiscal tightening. The government's rationale was that the student loan system was becoming increasingly expensive for the taxpayer, with the RAB (Resource Accounting and Budgeting) charge — the proportion of student loans expected to be written off — rising to nearly 50%. Freezing the threshold was a way to reduce this cost by ensuring graduates repaid more.

The timing of the freeze was particularly unfortunate for borrowers. It coincided with a period of high wage growth (driven partly by post-pandemic labour market tightness and inflation), meaning the gap between wages and the frozen threshold widened rapidly. A graduate earning £30,000 in 2021/22 who saw 3% annual salary growth would have been earning approximately £34,800 by 2025/26. Without the freeze, the threshold might have been approximately £30,000 or higher. Instead, this graduate was paying 9% of (£34,800 minus £27,295) = 9% of £7,505 = £675.45 per year. Had the threshold risen to £30,000, they would have been paying 9% of £4,800 = £432.00 per year — a difference of £243.45 per year. Over five years, the cumulative additional cost of the freeze for this specific borrower would be approximately £800-£1,000, depending on the exact timing of salary increases.

Worked Example: Full Impact of Plan 2 Freeze

Let us trace the impact of the Plan 2 freeze through a detailed worked example. We will compare two scenarios for a graduate who earned £32,000 in April 2021 and received 3% annual salary increases throughout the freeze period.

Total additional repayments due to freeze: approximately £450.54 over four years.

This example uses a 3% annual threshold uplift, which is conservative — had the threshold been linked to average earnings growth, which exceeded 5% in several years during this period, the gap would be even wider. At higher salaries, the absolute extra cost is identical (it is always 9% of the threshold gap), but the percentage increase in repayments is smaller. At lower salaries closer to the threshold, the freeze can mean the difference between paying something and paying nothing, making the proportional impact much larger.

Over a full 30-year loan lifetime, the four-year freeze is estimated to cost the typical Plan 2 borrower between £2,000 and £5,000 in additional total repayments. For borrowers who will not repay in full (the majority), these are real additional payments that would not have been made had the threshold risen with inflation. For the minority who will repay in full, the additional repayments accelerate repayment and may slightly reduce total interest, partially offsetting the cost — but the net effect is still negative for borrowers.

Plan 5 — Frozen by Design

Plan 5, introduced for students starting courses from September 2023 onwards, has a threshold that is frozen by design rather than by subsequent policy decision. The Plan 5 framework set the threshold at £25,000 with no automatic inflation link. The government stated that the threshold would be reviewed but not before 2027.

This means Plan 5 borrowers face a guaranteed threshold freeze for the first four to five years of their repayment period. With inflation running at 2-4% per year, the real value of the £25,000 threshold is eroding steadily. By 2027, £25,000 in 2023 prices will be worth approximately £22,000-£23,000 in real terms. This means Plan 5 borrowers will effectively start repaying at a lower real salary than the headline £25,000 figure suggests.

The Plan 5 threshold is also lower than both Plan 2 (£29,385) and Plan 4 (£33,795), meaning Plan 5 borrowers start repaying earlier than their predecessors on Plan 2. Combined with the 40-year write-off period (10 years longer than Plan 2), Plan 5 borrowers face a longer repayment window starting from a lower threshold. The trade-off is a lower interest rate (the same as Plan 1, capped at the lower of RPI or base rate plus 1%), which benefits the minority who will repay in full. Use our Plan 5 calculator to model how the threshold affects your repayments.

Postgraduate Loan — The Permanent Freeze

The Postgraduate Loan threshold has been at £21,000 since the scheme was introduced in 2016/17. It has never been increased. In real terms, the £21,000 threshold has lost approximately 25-30% of its value since 2016, meaning graduates start repaying their Postgraduate Loans at a much lower real salary than was originally intended.

This is effectively a permanent freeze, though the government has never formally committed to keeping it at £21,000 indefinitely. The impact is significant: a postgraduate earning £25,000 repays 6% of £4,000 (the gap above the threshold), which equals £240 per year. Had the threshold risen with inflation to approximately £27,000, this graduate would pay nothing. The freeze means that even relatively low-earning postgraduates make repayments, which was arguably not the original policy intent when the £21,000 threshold was set in 2016.

Postgraduate borrowers who also have an undergraduate loan face a double burden: they repay 9% above the undergraduate threshold and 6% above the Postgraduate threshold simultaneously. The combined deduction at a salary of £35,000 (with Plan 2 at £29,385 and Postgraduate at £21,000) is 9% of £5,615 plus 6% of £14,000 — that is £505.35 plus £840 = £1,345.35 per year, or £112.11 per month. The frozen Postgraduate threshold exacerbates this dual burden for every borrower who holds both loan types.

How the Freeze Compares to a Rate Increase

It is instructive to compare the impact of a threshold freeze to a hypothetical increase in the repayment rate from 9% to, say, 10%. Both mechanisms increase what graduates pay, but they operate differently. A rate increase affects everyone above the threshold equally in proportional terms — everyone pays 11% more than before (10% divided by 9%). A threshold freeze disproportionately affects those earning just above the threshold, who may go from paying nothing to paying something, while higher earners are less affected in percentage terms.

A five-year threshold freeze at a time of 3% annual wage growth is roughly equivalent to a permanent 1-2 percentage point increase in the repayment rate, in terms of the additional repayments generated over the loan lifetime. The government arguably preferred the freeze approach because it is less visible, requires no legislation (thresholds can be changed by statutory instrument), and can be reversed without admitting to a rate change. The political optics of "we did not change anything, we just did not increase the threshold" are far better than "we increased the repayment rate from 9% to 11%".

What the End of the Plan 2 Freeze Means

The increase of the Plan 2 threshold from £27,295 to £28,470 in 2025/26, and then to £29,385 in 2026/27, marked the end of the four-year freeze. For more details on the new thresholds, see our article on 2026/27 repayment thresholds. However, the government announced in the Autumn Budget 2025 that the Plan 2 threshold will be frozen again at £29,385 from April 2027 for three years. This means Plan 2 borrowers face another period of fiscal drag starting in 2027.

The additional repayments made during the four frozen years cannot be recovered. The threshold increase for 2026/27 stops the bleeding but does not reverse it. Moreover, there is no guarantee that the threshold will continue to rise with inflation in future years — the government retains the power to freeze it again at any time.

For borrowers who will not repay in full, the end of the freeze is an unambiguous positive: it reduces future annual repayments, reducing the total amount paid over the remaining loan lifetime. For borrowers who will repay in full, the picture is more nuanced: lower repayments mean a longer repayment period and potentially more interest, partially offsetting the benefit. The net effect depends on the interaction between the threshold increase, the interest rate, and the borrower's remaining balance. Use our calculators to model your specific scenario: Plan 1, Plan 2, Plan 4, or Plan 5.

Protecting Yourself from Future Freezes

While you cannot control government threshold decisions, there are strategies that can mitigate the impact of a freeze. Salary sacrifice arrangements reduce your gross salary for student loan purposes, effectively lowering the gap between your salary and the threshold. If a freeze means you are paying more, salary sacrifice can claw back some of that additional cost — particularly if you were already close to the threshold before the freeze.

Understanding your repayment trajectory is also important. If you know you will not repay in full regardless of the threshold, then a freeze is a straightforward cost — every pound of additional repayment is a pound you would not have paid otherwise. If you are on track to repay in full, a freeze accelerates your repayment and may not cost you as much in total after accounting for reduced interest. The key is knowing which category you fall into, which our calculators can help you determine. See our guide on whether to repay early for a detailed framework.

Key Takeaways

• A threshold freeze means the salary at which you start repaying does not rise with inflation, causing you to pay progressively more each year as your wages increase.
• The Plan 2 threshold was frozen at £27,295 from 2021/22 to 2024/25 — four years, costing the typical borrower £2,000-£5,000 in additional lifetime repayments.
• Plan 1 was previously frozen in the mid-2010s, with catch-up increases applied from 2023/24 onwards.
• Plan 5 has a legislated freeze at £25,000 until at least 2027, building fiscal drag into the loan design from day one.
• The Postgraduate Loan threshold has been permanently frozen at £21,000 since 2016, losing approximately 25-30% of its real value.
• Fiscal drag from threshold freezes disproportionately affects those earning just above the threshold.
• A four-year freeze at 3% wage growth is roughly equivalent to a 1-2 percentage point permanent increase in the repayment rate.
• The Plan 2 threshold increased to £28,470 in 2025/26 and to £29,385 in 2026/27, but will be frozen again at £29,385 from April 2027 for three years.
• Salary sacrifice can partially mitigate the impact of threshold freezes by reducing gross salary for student loan purposes.

For a full picture of how threshold changes and freezes affect your personal repayment plan, explore our Plan 2 calculator, our article on 2026/27 thresholds, and our guide on how repayments work. If you are self-employed and want to understand how thresholds apply to your Self Assessment, see our article on student loans for the self-employed.