This blog was kindly authored by Jack Booth, Maike Halterbeck, and Gavan Conlon at London Economics.
There has been wide-ranging coverage of the recently announced freeze to the Plan 2 student loan repayment threshold in England (The Times, Guardian, Financial Times and many more), as graduates and the media begin to understand that the majority of Plan 2 graduates are unlikely to ever pay off their loan balance within the 30-year repayment period.
While the policy was announced by the UK Government in the November 2025 budget, the Welsh Government has just announced that it will not follow suit. This is a big decision from the Welsh First Minister.
So, what has potentially driven the Welsh First Minister’s decision?
The Welsh Government’s recent call for evidence on tertiary education in January stated that it was:
in discussions with HMT and the Department of Education regarding the implications of the Plan 2 threshold freeze decision for Wales.
The decision to freeze the threshold (or not) is even more important in Wales than in England as – unlike England which moved to Plan 5 from 2023-24 onwards – Wales has remained on Plan 2 repayment terms, so all current students are still on Plan 2 once they graduate.
In this blog, we assess the impact of the potential threshold freeze on the 2025-26 cohort of Welsh domiciled students. On the surface, the freeze might seem like a relatively minor change, but it in fact would have significant impacts. This may explain the Welsh Government’s decision to opt for the status quo.
How does the Plan 2 repayment system work?
Graduates are on the Plan 2 repayment plan if they are English domiciled and started their course between 2012-13 and 2022-23 (after which English students moved onto Plan 5) or are Welsh domiciled and started their course since 2012-13. Graduates on this plan currently repay 9% of their income above £28,470, with the threshold traditionally increasing each year in line with RPI inflation (so the threshold will increase to £29,385 in April 2026). The interest applied to the loan balance starts at RPI (currently 3.2%) and increases to RPI + 3% (currently 6.2%) for higher earners.
In its November 2025 budget, the UK Government announced a three-year freeze of the threshold (at £29,385) from April 2027 to March 2030. Without this freeze, we would expect the threshold to rise to approximately £32,545 by April 2029 (based on OBR forecasts). While the threshold freeze might seem like a small and ‘temporary’ change to the loan repayment terms, it would in fact result in a lower repayment threshold in every year of the 30-year repayment period for the 2025-26 student cohort. Therefore, it has a substantial impact.
What would have been the impact of adopting the freeze in Wales?
The figure below presents the estimated impact of the threshold freeze on graduates’ total lifetime loan repayments (by income decile and gender).
Overall, if the Plan 2 freeze had been implemented in Wales, graduates’ average lifetime repayments would have increased by £3,300 for men (from £65,600 to £68,900) and by £5,100 for women (from £39,000 to £44,100).
However – as so often when it comes to the complex system of student loan repayment – the freeze would have had important distributional effects. Essentially, only lower- to middle-income graduates (1st to 4th decile for men, and 2nd to 8th decile for women) would be affected by the threshold freeze. This is because their earnings are insufficient for them to ever be expected to fully pay off their loan (i.e. they make repayments for the entire 30-year repayment period). With the freeze, lower- to middle-income graduates’ total repayments over the 30 years would have been higher (by between £7,000 and £8,000 over their lifetimes). In contrast, higher-income graduates would have been basically unaffected by the Plan 2 threshold freeze.
What are the implications of Wales not following the English policy?
The Welsh Government just confirmed that it will not follow the Westminster Government’s Plan 2 repayment threshold freeze. The key issue now is that, while the student loan outlay provided to Welsh domiciled students is funded by HMT, this is conditional on the cost of the Welsh student finance system being ‘broadly comparable’ to the English system.
The specific problem here relates to student loan impairments (the RAB charge) – in other words, the amount of the student loan outlay that is expected to not be repaid. For HMT to fund student loans for Wales, this RAB cost needs to be ‘within a reasonable range’ of the corresponding RAB cost for English domiciled students (adjusted for the relevant Barnett formula comparability percentage), according to HMT’s Statement of Funding Policy.
The Plan 2 threshold freeze in England is aimed deliberately at reducing the English RAB charge.
Our modelling suggests that the decision of the Welsh Government not to implement the freeze increases the RAB charge by approximately 8 percentage points. The additional cost associated with this decision is in the region of £74 million per cohort (or about 23% of the total costs of funding undergraduate students). The Welsh Government may now need to cover this cost from elsewhere if the loan system is no longer assessed to be ‘within a reasonable range’ of the English system. The Welsh Government have (candidly) acknowledged this possibility in their recent call for evidence, stating that:
these pressures will likely require the Welsh Government to review and amend its ongoing policy on student support outlay, and student loan repayments.
As outlined here, adopting the threshold freeze would have been regressive: high-earning graduates would be basically unaffected, but lower-income and middle-income graduates would be made worse off. However, as always, with scarce public resources spread thinly, the costs of this decision may need to be borne elsewhere.
Want to know more?
Our more detailed analysis, including further charts and additional impacts of the repayment freeze, can be found here on our website.