Treasury hints at U-turn on student loan repayment freeze
The Government has also agreed to make it clearer that student loan terms and conditions can change, after the Commons Treasury Committee warned that the way the loans were presented amounted to mis-selling.
The Treasury has said it has not ruled out scrapping the threshold freeze for graduates repaying their student loans.
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The Government has also agreed to make it more transparent that the terms and conditions of a student loan can be changed, adding that all aspects of the finance system are kept under review.
The move comes after the Commons Treasury Committee issued a warning that the way the loans had been presented amounted to mis-selling.
Ministers have faced growing criticism over their management of repayment terms for graduates, particularly those who took out “Plan 2” loans.
Plan 2 loans affect those who took out these loans between September 1 2012 and July 31 2023 in England.
Graduates are expected to be left worse off as a consequence, as the threshold would have otherwise risen with inflation.
When they were introduced in 2010, the Plan 2 loan threshold was intended to increase with inflation each year. However, it has been frozen on numerous occasions since 2016.
The Treasury Committee encouraged ministers in July to commit to reversing the freeze at the next Budget this autumn, in a published report.
In response to the report, the Government said it “recognises” the cost-of-living challenges that many graduates face and “understands concerns” about the effects of repayment terms.
“We keep all aspects of the student finance system under review,” it continued.
“Decisions on student loan repayment arrangements must be considered alongside wider fiscal priorities, the long-term sustainability of the higher education funding system, and the need to ensure value for money for taxpayers.
“Any significant changes require careful consideration of their impacts on borrowers, taxpayers and public finances.
“The Government will continue to consider opportunities to ensure the fairness of the student finance system for borrowers, taxpayers and public finances.”
Chair of the Treasury Committee Dame Meg Hillier urged the Chancellor to use the approaching Budget to “give graduates some much-needed breathing space”.
The Government also recognised “more can be done” to support those taking out the loan to understand the system, and revealed new guidance will make “more prominent” the fact that regulations may be updated by Government and Parliament.
Sir Philip Augar, chairman of the Augar Review into higher education funding, told the committee during its inquiry that numerous governments had made changes to the terms and conditions of some student loans in an “almost sneaky way”.
He said to the group of MPs, which were from a range of parties: “I don’t think there were bad actors in this, but it’s just each administration has made a small change.
“You add them all together, you compound them and you get the current distorted situation.”
After the Government’s response to the committee report, Dame Meg added: “The commitment to right a historical wrong by updating the information so that prospective students are properly informed before taking out a massive loan is an important step forward.
“Unfortunately, though, it doesn’t help graduates who are angry that they didn’t receive the same service and are now facing punitive repayment terms on a loan which keeps growing. And they are juggling that stress with other huge pressures like trying to get on the housing ladder and save for a pension. I say it again, we must give young people a fair chance.
“Importantly, the Treasury has not ruled out reversing the threshold freeze but instead says the whole student finance system is under review.
“I recognise that finances are tight but I continue to urge the Chancellor to look at this again. I sincerely hope he will use his upcoming budget to give graduates some much-needed breathing space.”
Interest on Plan 2 loans is charged at the rate of retail price index (RPI) inflation plus up to 3%, with this being determined by how much a graduate earns.
Since the start of September, the interest rate has been capped at 6%. This decision has come in to protect graduates from rising inflation during the war in Iran.
Many graduates have found that despite repaying their loans over several years, their debt balance has either risen or stayed the same because of inflation.