Reverse student loan threshold freeze, Labour told as MPs warn that millions were mis-sold
A cross-party committee has warned the freeze will leave many graduates worse off and deepen pressure on younger people already struggling with the cost of living
The next chancellor must scrap a planned freeze on the student loan repayment threshold, MPs have said, warning graduates are being quietly saddled with extra costs for years to come.
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A cross-party Commons Treasury Committee said Rachel Reeves’ successor should reverse the move at the next Budget, arguing the policy will leave many graduates worse off and deepen pressure on younger people already struggling with the cost of living.
The MPs also accused the Government of behaviour amounting to the mis-selling of student loans, saying students had not been given clear enough information about how the system works or the fact ministers can change loan terms retrospectively.
The criticism centres on so-called Plan 2 loans, taken out by students in England between 1 September 2012 and 31 July 2023.
At the Budget in October, the Chancellor froze the salary threshold at which graduates start repaying their loans for three years from 2027.
That means from next year, borrowers will repay 9% of everything they earn above £29,385 until 2030.
Because the threshold would otherwise have been expected to rise with inflation, many graduates are likely to end up paying more.
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When Plan 2 loans were introduced in 2010, the threshold was supposed to increase with inflation each year.
But it has been frozen several times since 2016.
In its report, the Treasury Committee said the student loans system is “layering stress” on people in their 20s and 30s in a way previous generations did not face.
It described younger people as the “engine room” of the country and said the freeze was a “convenient option” for loading extra fiscal pressure on to them while hoping they would not notice “for decades to come”.
MPs said ministers should commit to reversing the freeze at the autumn Budget, when a new government, likely to be led by Andy Burnham, is expected to be in power.
They said doing so would cost £355 million by 2029-30, but described it as a modest step that could help rebuild trust in the student finance system.
Treasury Committee chair Dame Meg Hillier said: “It is not common for a Treasury Select Committee, made up of MPs from the three largest parties, to agree that a specific Budget measure announced by a Chancellor must be reversed.
"Our report is a signal to the Treasury and the Department for Education that this can no longer be ignored. Patience has run out.
“Ministers openly accept that the system is broken and unfair but have said that it is not a priority to fix it.
"While I understand that there are many competing pressures on a government, reversing last year’s threshold freeze is a modest change that would not eat up vast resources.
“Importantly, I believe it would go a long way to repairing the damage done to the trust between graduates and those responsible for overseeing the student loans system.”
The committee also singled out what it said were examples of mis-selling.
These included Department for Education YouTube videos that failed to make clear the Government can retrospectively change loan terms, adverts comparing monthly repayments to the cost of a mobile phone bill or cinema tickets, and a lack of clarity from the Student Loans Company during the application process about ministers’ power to alter conditions.
Earlier this year, the Government announced interest on student loans would be capped at 6% from September to shield graduates from rising inflation during the war in Iran.
Many borrowers have seen their debt stay the same or even increase despite years of repayments because of inflation-linked interest.
While MPs welcomed the cap as a “step in the right direction”, they said it would mainly help the highest earners who are likely to repay their loans in full.
A Government spokesperson said the report “lays bare the confused and broken system inherited by this Government”.
They added: “We are already taking decisive action – raising the repayment threshold in both of the last two years for the first time since 2021, capping maximum interest rates to protect graduates from rising costs, and reintroducing maintenance grants to expand opportunities for people from all backgrounds.”
The spokesperson said it was also “vital students are given clear and accurate information so they can make informed decisions about their future”, adding: “We are working closely with the Student Loans Company on communications to students.”
A Student Loans Company spokesperson said it recognises “the importance of ensuring that students and borrowers across all repayment plans have access to clear, accurate and timely information about student finance”.
They added: “We take this responsibility seriously and we will continue to work closely with the Department for Education, including on any wider actions arising from the report.”