MPs have launched an inquiry into the student loan system amid anger from graduates over repayment terms.
The Treasury Committee will assess the recent decision by the chancellor to freeze the repayment threshold for those on Plan 2 loans for three years from April 2027 as part of the 2025 Autumn Budget.
The Department for Education (DfE) said the freeze was being implemented to “protect taxpayers and students”.
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The Committee will also look at whether students’ repayment terms are “reasonable and proportionate” when paid alongside other taxes such as income tax.
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Students now leave university with more than £50,000 in student loan debt, according to the Institute for Fiscal Studies (IFS).
Meg Hillier, chair of the Treasury Committee, said the purpose of the inquiry was to assess whether “goalposts have been moved in a way which is unfair to graduates”.
“Upward interest rates and sometimes particularly high marginal tax rates have clearly led to widespread dissatisfaction among graduates who may not have fully understood their repayment terms and the possibility they could change,” Hillier added.
The furore over Plan 2 student loans
The Treasury Committee will assess the fairness of all student loans with a particular focus on Plan 2 loans.
These loans were issued to students who started university courses between September 2012 and July 2023.
From the April after graduating, borrowers on Plan 2 loans have to make loan repayments on 9% of any earnings above £28,470, the current threshold.
Students who started a course on or after August 2023 are on Plan 5 loans and have to make loan repayments of 9% on earnings above a lower threshold of £25,000.
If you don’t earn enough over the thresholds, you don’t make repayments.
But students on Plan 2 loans are charged much higher interest rates than those who took out Plan 1 (1998-2011) or Plan 5 loans.
Interest on Plan 1 loans rises in line with the lower of the Retail Price Index (RPI) measure of inflation or bank rate plus 1% while interest on Plan 5 loans increases in line with just RPI.
However, for Plan 2, the interest rate is RPI + 3% while you are studying, and once graduated it’s applied on a sliding scale between RPI and RPI + 3% (once income is above £51,245).
The difference in the size of the interest applied has seen many on Plan 2 loans left furious as their debt piles higher and higher.
Critics of student loans have suggested lower and middle income earners suffer more than higher earners who can pay off their debt quicker, or those with wealthy parents who can front up the costs for university.
Amira Campbell, president of the National Union of Students, said: “No graduate should be financially penalized by retroactive changes to contracts that they signed when they were 17, repayment thresholds should be fair and increase with inflation, and interest rates should not feel like a psychological burden on low and middle earning graduates.”
What could The Treasury recommend?
It’s hard to say at this point what the Treasury Committee will recommend as part of its inquiry.
It is allowing anyone aged over 16 to share their experiences directly with the inquiry through an online survey. Questions will include whether students would take out the loan today if given the option and whether repayments are having a material impact on their finances.
Both the Conservative Party and the Liberal Democrats have put forward suggestions of what they would do to address the student loans issue.
The Conservative Party has proposed reducing the interest rates on Plan 2 loans to just RPI, with the party’s leader Kemi Badenoch stating loan repayments have become a “scam”.
The IFS argued that this wouldn’t make a difference to most graduates’ monthly repayments as the amount repaid each month is based on earnings rather than the balance left on the loan.
Meanwhile, the Lib Dems suggested the repayment threshold be increased every year in line with average earnings.
The IFS said both the Conservative’s and Lib Dem’s proposals would shave £11,000 and £8,000, respectively, off the average lifetime repayment of someone on a Plan 2 loan starting university in 2022.
