The Treasury Committee report entitled Student loans: Broken and unfair? calls for urgent reform to the student loans system and highlights widespread ‘mis-selling’ in promotional materials.The government has a ‘moral obligation’ to reverse the decision to freeze the threshold at which student loans are repaid, according to the report.
Charlene Young, senior pensions and savings expert at AJ Bell, comments:
“The freeze on repayment and interest rate thresholds thrust student finance into the spotlight and graduates might feel vindicated by the language in today’s Treasury Committee inquiry report. But the uncomfortable reality is that, even if student loans were mis-sold, the system sits outside the usual FCA and consumer credit protections, meaning no legal recourse.
“While the Committee cannot open the door to a PPI-style compensation scheme itself, slapping a ‘mis-sold’ label on the loans endorses the argument that student borrowers were not properly informed about the prospect of retrospective changes to the terms. It reinforces the moral and political case for faster change to the student loan system when you consider the clear differences between how commercial lenders are regulated.”
Report findings
“Examples of mis-selling called out in the report include comparing loan repayments to the cost of a mobile phone contract or going to the cinema, despite this being way off the mark for higher earners paying hundreds of pounds in loan repayments every month.
“Downplaying the impact on getting a mortgage was also called out as another example of poor practice. Although a student loan balance wouldn’t count as existing lending, deductions from earnings reduce disposable income and therefore affect mortgage affordability.
“Also particularly damning was the non-disclosure of the ability for government to vary the terms and conditions of loan agreements retrospectively, and the lack of clear legal responsibility between the Department for Education and the Student Loans Company.
“The government sent ministers to the inquiry to give evidence that they inherited a broken system. But the Chancellor made an active choice in her 2025 Budget to freeze repayment and interest thresholds for those on Plan 2 loans, worsening the situation further. As most will never pay off their loans, freezing the repayment threshold just means more of their income is subject to the 9% repayment charge, adding to the amount they’ll pay back before the balance is written off after 30 years.
“Freezing the earnings threshold at which repayments start hits graduates in the pocket, with AJ Bell calculations showing someone could easily find themselves facing an additional £250 a year of payslip deductions by the time the threshold is due to rise again in 2030. Over the lifetime of the loan that could amount to almost £10,000 of additional repayments for a graduate whose payslip includes a student loan deduction for the full 30 years. Although the exact impact is hard to predict and could be more or less depending on future inflation.
“To address some of these issues the obvious starting point – as highlighted in the report – is unfreezing repayment thresholds and bringing forward the switch from the RPI inflation measure to CPIH. This is due to happen anyway in 2030 when the two measures are officially combined. The delay until 2030 is due to an issue with compensation for holders of index-linked gilts, but government has already accepted RPI as flawed for over a decade so it’s hard to justify continuing to use it to inflate student loan balances until up until then.”
