Tom nearly did not become a doctor. He had always wanted to go to medical school, but when he was 17, his mock A-level results fell short. A hospital consultant told him that he should forget it while on work experience.

So he did a science degree and then a two-year master’s to become a physician’s associate. But working in the hospital made him even more determined to become a doctor. Eventually, he opted for a four-year graduate medical degree.

His less direct route to medicine means he has an exceptionally large pile of student debt. Currently it totals £112,000. And it’s about to get bigger.

This year, the 31-year-old will finish his graduate medical degree and start work. But when he starts making repayments, they will be dwarfed by the interest added to the loan.

Based on his resident doctor’s salary, accountancy firm RSM estimates Tom will make repayments on his debt pile of around £1,650 in his first year of employment. Over the same year, the interest added to the pile will be around £4,700.

“It feels insane. The interest becomes exponential. I will just never be able to pay that off,” says Tom, who asked to speak using a different name given the sensitive financial details involved.

He describes how the sums are demoralising. “I love my work, I enjoy the hospital. I’ve worked in the NHS for 10 years. I’m not doing this just because it pays the bills. I’m doing it because I genuinely love what I do.

“But it’s like I’m being punished for being driven to get a good career and do my job.”

His situation is emblematic of the fact that England’s student finance system is a mess that is dragging on the entire economy. In 2024-25, the total interest added to England’s student loans was £15bn, compared to just £5bn in repayments.

It will ultimately fall on the taxpayer to make up for graduate debt that will never be repaid, placing a greater burden on those in work.

To make matters worse, student loans are also failing at their basic purpose: funding education. Universities across the country are fighting financial crises.

“It’s broke, completely,” says Labour peer Baroness Margaret Hodge.

Tom’s loan might be unusually large but even for a typical graduate the outlook is bleak. A raft of decisions made more than a decade ago are cranking up the cost of higher education to unsustainable levels and taking a slow, insidious toll on ambition.

In 2011-12, total outstanding student debt in England was £40bn. Graduates left education with an average debt of £16,500.

A year later, David Cameron’s coalition government made dramatic changes to the system, tripling the fees that universities could charge to £9,000 per year and introducing a new system of loans to cover the costs.

The reforms shifted the burden of funding from the taxpayer to students and, in doing so, enabled caps on student numbers to be lifted and broadened access to higher education.

After Cameron’s changes, outstanding student debt has increased by 562pc to a record £267bn.

The average graduate in 2024 owed £53,000 by the time they started making repayments in April 2025 – more than triple the 2011 total.

Student numbers soared and the proportion of 18-year-olds from low-participation neighbourhoods enrolling in higher education surged from 14pc in 2012 to a record 23pc in 2023.

The Government now lends some £21bn to 1.5 million students every year.

And these loans come with some perks. Graduates do not have to start making repayments until they are earning above a threshold, currently set at £28,470. Repayments are structured as a 9pc charge on their salary, keeping it affordable for lower earners. And if they do not repay the loan after 30 years, the debt is written off.

But there are also serious drawbacks. The interest rate on “Plan 2” loans – issued between 2012 and 2022 – is set at up to three percentage points above the retail price index (RPI), a widely discredited measure of inflation that experts say overstates it.

Interest is also set at a sliding scale, increasing for higher earners.

Borrowers who took out student loans on “Plan 1” before 2012, by contrast, pay interest at RPI or the Bank Rate plus one percentage point, whichever is lower.

When RPI soared to a 42-year high in the aftermath of the pandemic and Russia’s full-scale invasion of Ukraine, the interest rate charged on Plan 2 loans exploded.

The Tory government had to intervene to set caps, without which the interest rate would have climbed to 16.5pc. But even with the caps, the interest rate peaked at 8pc in 2024.

This inflation surge meant that the interest added to England’s outstanding student loans in 2022-23 was double the amount that graduates repaid. In both 2023-24 and 2024-25, it was triple.

Luke Charters, a Labour MP, is a vocal advocate of student loan reform and is rallying supporters to his cause under the acronym “Gorila” – graduates opposing repayment injustice and loan arrangements. He has called England’s student loans “a mis-selling scandal”.

Oliver Gardner, from the campaign group Rethink Repayment, says: “We were told that these loans were the best loans you’ll ever get.”

Many of the campaign’s supporters received poor advice, says Gardner. They did not understand that their interest rate would increase as their salaries rose, and thought that the debt would have no impact on their ability to take out a mortgage loan.

“One said that they didn’t go to university but their bank adviser suggested they at least just enrol for the first year because the student loan would be the easiest money they would ever borrow,” says Gardner.

“It’s absurd to expect a 17-year-old who doesn’t have an income and isn’t paying taxes to understand what 9pc on your marginal tax rate means.”

The costs are making it harder for graduates to save and get on the housing ladder.

Charters says: “I’m nervous that it could create a ticking time bomb for a future generation who have not been able to save sufficiently for their pensions. I know so many friends who have opted out of their employee pensions.

“This could trap an entire generation in financial strain because of these high repayments.”

The Labour MP calls the student loans system “Frankenstein’s monster”.

There are broader implications beyond simply personal financial circumstances.

If earning more money simply lands you with a ratcheting higher tax rate, why even bother? Critics say the system effectively penalises aspiration – becoming a drag on growth.

While repayments are kept low for low earners, the system pushes higher earners into a nasty tax trap.

Tom hopes one day to become a consultant. Theoretically, this would mean a salary of more than £100,000. But he wants to make sure he never earns this much money.

Workers earning between £100,000 and £125,140 are already subject to a marginal tax rate of 62pc when including National Insurance as they gradually lose their personal tax-free allowance. Graduates paying off student loans at 9pc will face a marginal rate of 71pc .

Tom is also paying off a postgraduate loan – which will be charged at 6pc of his salary above a threshold of £21,000. That means if he starts earning more than £100,000, his marginal rate – how much tax he pays above £100,000 – will be 77pc.

According to analysts at AJ Bell, this means that for every pound he earns above £100,000, his take-home pay will be 23p.

“I would go out of my way to make sure that I’m not losing out. At the £100,000 limit, you lose everything,” says Tom.

“My partner and I have spoken about the fact that we will make sure that we actually reduce our hours so that we will earn under that, go down to 80pc or however much.”

As well as discouraging people from going for promotions or taking overtime shifts, fears are mounting that the prospect of sky-high debt is starting to deter lower-income students from applying for higher education altogether.

Alex Stanley, vice-president of higher education at the National Union of Students (NUS), says: “It’s a complete mess, and I think it’s getting to the stage now that we are genuinely very worried about working-class prospective students being put off going to university.”

Baroness Hodge, who was MP for Barking from 1994 to 2024 and was universities minister under Tony Blair, says: “When I was in my old constituency in 2023, before the election, talking to sixth-formers, the fear of debt was a real influence on whether or not they went to university.

“When people talk about fees and say, ‘You don’t have to pay it back’, that is a really middle-class attitude. For working-class kids, the idea that they get into debt but they don’t have to pay it back is not in their consciousness.”

Official figures show the share of 18 to 20-year-olds from so-called “higher” working-class backgrounds enrolling in higher education fell for the first time in 2022-24, dropping from 34pc to 32pc.

Rethink Repayment is calling on the Government to lower the repayment rate from 9pc to 5pc to reduce the harm to work incentives. It also wants a cap on interest payments.

A 2019 review of the Post-18 education system led by Sir Philip Augar, the City grandee, recommended that total repayments should be no more than 1.2 times the original loan sum.

Charters argues that graduates should be given the choice to reduce their repayment rates in exchange for a longer loan term. “That could be a cost-free move for the government to ease cost of living pressures for hundreds of thousands of graduates,” he says.

“Back when this was being designed, there was a huge lack of foresight of what would actually come further down the track.”

England’s ballooning amount of student debt looks like an alarming problem for the public finances.

Between 2022-23 and 2024-25, the amount of student debt getting written off jumped by 415pc to hit a record £304m.

The surge was huge; the sum was small fry. But in two decades’ time, the Government expects the amount will be 100 times that.

When the first cohort of high tuition fee-payers with Plan 2 loans will reach the end of their 30-year loan terms in the late 2040s, the Government expects student loan write-offs to increase rapidly to nearly £30bn per year.

Plus there will be another smaller surge when those on Plan 5 loans, issued from 2023 with 40-year terms, roll off in the late 2060s.

The Government has long known that much of this money will never be seen again.

In 2018, the Office for National Statistics (ONS) ruled that student loans could not be treated like traditional loans that would be fully repaid in the public accounts and the Government must instead make a calculation of what proportion of its outlays will inevitably be written off.

It was a decision that instantly blew a £12bn hole in the public finances.

Since then, when student loans are issued, the proportion of the loan which the Government expects will be repaid is counted as a financial asset. And the proportion that the Government expects will not be repaid is classed as a government expenditure.

This means the coming surge in loan write-offs has already been baked into the government finances, says Kate Ogden, of the Institute for Fiscal Studies.

But the costs are still big. As things stand, student loans will on average add an extra £10bn per year to public debt from 2025-26 to 2030-31, according to the Office for Budget Responsibility (OBR).

This matters when the UK’s national debt has been growing at the fastest pace of any rich country and our debt interest payments are already more than £100bn per year.

The problem for the public purse is only likely to get bigger.

The Department of Education forecasts that annual student loan outlays will increase by 26pc between 2024-25 and 2029-30 to hit £26bn.

The Government expects the value of outstanding loans to rise from £267bn at the end of March 2025 to £500bn (in 2024-25 prices) by the late 2040s.

Politicians are trying to claw back cash. Interest rates are in part so high because the Government knows a significant minority will not repay their loans in full. For those who do, the higher interest rates will help make up the difference.

“Those fees work on the assumption that lots of people won’t pay them back,” says Baroness Wolf, a former No10 adviser and part of the panel of the Augar Review.

The highest earners paying the highest interest rates effectively subsidise the lower earners whose debts will eventually get written off.

In her autumn Budget, Rachel Reeves also announced a three-year freeze in the repayment threshold for Plan 2 loans from April 2027, which would normally be uprated in line with inflation.

This will bring in an extra £400m a year, as more graduates are dragged across the threshold and others make repayments on a larger proportion of their salary in a process known as fiscal drag.

For the newest cohort of borrowers, the Government has changed tack.

Students borrowing for courses that began in 2023 onwards have taken out loans under the new Plan 5 – which has a longer, 40-year term before the debt is written off and a lower repayment threshold of £25,000. However, it also has a lower interest rate, charged at RPI.

These borrowers make smaller payments over a longer term and are therefore more likely to repay their loans in full. The Government forecasts that 56pc of full-time undergraduates starting in 2024-25 will do so, up from 32pc for the 2022-23 cohort.

But there seems to be little appetite for structural reform. The current Government will probably kick the problem down the road, says Baroness Wolf.

“I don’t feel like there’s anybody in the Cabinet for whom this is a priority.”

Britain’s university fees are an international outlier.

Figures from the Organisation for Economic Co-operation and Development (OECD) show that the UK charges the highest tuition fees for national students at public institutions of any rich nation. (The US charges higher fees at private universities, but fees at its state universities are lower than Britain’s.)

The share of funding that universities get from government sources in the UK is the lowest in the OECD. And English pupils are also among those that are most reliant on direct public financial support to cover their fees.

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The charts tell a strange story about university finance reform over the last two decades.

At the end of the New Labour government, degrees were funded using a combination of student loans and direct government payments through teaching grants, which were linked to the cost of courses.

Universities therefore received larger payments for degrees that were more expensive to provide, such as engineering.

Then came 2012, when the government raised the tuition fee cap and shifted to funding universities primarily through fees, which in turn are funded through student loans.

“They knew very clearly that the way they set it up they were going to have quite a lot of money that was never repaid,” says Baroness Wolf.

“So it wasn’t that they were actually ceasing to put public money in, but they were kind of hiding it by giving people huge loans.”

The fee increase and loan system unlocked a surge in UK student numbers and enabled a brief golden era of university funding. But the cash boost did not last.

The tuition fee cap did not rise with inflation and the government scaled back teaching grants.

In the decade to 2025-26, real-terms funding per student has dropped by 35pc, according to Universities UK (UUK). Last year, four in 10 universities were in financial deficit – with many cutting thousands of jobs and others launching mergers.

“The state has created and is sticking to a system which is actually very inefficient. It pretends that everything is coming from fees and it creates all sorts of bad incentives by doing that,” says Baroness Wolf.

The system discourages universities from offering the expensive, lab-based courses that Britain needs to feed its skills gap. Instead, they have turned to cheap courses of questionable economic value, and to using international students to subsidise tuition for domestic pupils.

“We’ve got ourselves into a trap where we have created a funding model that’s inherently irrational,” says Baroness Wolf.

One of the key recommendations of the Augar Review was to try to rebalance the system by reducing the tuition fee cap to £7,500 per year and replacing the lost fee income by increasing teaching grants, but this was not taken up by the Government.

By contrast, in her Budget, Reeves announced that tuition fees would start to rise with inflation again from 2026.

She also said she will charge universities a £925 fee per international student from August 2028 – a move that vice chancellors have warned will hurt universities, which rely heavily on foreign cash flow.

A proliferation of degrees often does not spur growth, but simply increases the need for more people to get a degree to compete in the jobs market.

The big problem today is that there is little alternative to going to university. Widespread apprenticeship programmes would be an obvious solution, but efforts to date have struggled.

“I think we have all got ourselves caught in a real bind on this and it’s really hard to know how you get out of it,” Baroness Wolf says.

Meanwhile, one significant cost for the university sector is employer contributions to the Teachers’ Pension Scheme – which are 28.7pc of a lecturer’s salary. Half of UK universities are bound by law to offer the scheme.

“It is one of the highest employer contribution rates of any pension scheme in the country,” says Vivienne Stern, the UUK chief executive.

UUK has been asking the Government to give universities more freedom to choose alternative pension schemes in the same way that independent schools can.

Heavy regulation is also a major cost burden that could be eased. Universities in England have to use their resources to meet regulations by the Office for Students including on demonstrating that they work to prevent harassment and sexual misconduct on campus and also to protect free speech.

“I think we’re regulating for a system we can’t afford,” says Stern.

Whatever the solution, the need is urgent. “We’re not getting a system that feels like it’s working for anybody,” says Stern.

For students taking on the debt, the disincentives are only adding up.

“I want to do a job that I hope gives something back,” Tom says. “And the question [for young people] is how much are you willing to pay for that?”

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