A scathing official report has accused the UK government of mis-selling student loans, asserting that the current system is "broken and unfair." The Treasury Select Committee, which investigated the student finance system, has urged the government to reverse its decision to freeze the repayment threshold for certain student loans.
The report highlights that graduates who entered university before September 1, 2012, fall under Plan 1, while those starting between September 2012 and July 2023, or who are Welsh students since then, are on the Plan 2 scheme. English students starting on or after August 1, 2023, are on Plan 5, and Scottish students applying through the Student Awards Agency Scotland are on Plan 4. Undergraduates under these plans are required to repay 9% of earnings above a specific threshold: £26,900 for Plan 1, £29,385 for Plan 2, £33,795 for Plan 4, and £25,000 for Plan 5. Postgraduate loan borrowers pay 6% of earnings over £21,000.
Interest rates also vary. Plans 1, 4, and 5 accrue interest at 3.2%, equivalent to the RPI inflation rate from March of the previous year. Plan 2 interest rates are more complex, depending on income. Borrowers earning less than £29,385 are charged 3.2%. Those earning between £29,385 and £52,884 accrue interest at 3.2% plus up to an additional 3%, based on their income. Individuals earning £52,885 or more face an interest rate of 6.2% this year, which is set to be capped at 6% from the 2026-27 academic year.
The controversy intensified in January following a dispute between finance presenter Martin Lewis and Chancellor Rachel Reeves over the freezing of the Plan 2 repayment threshold. The initial threshold for repayment was £28,470 in the 2025-26 tax year. While an increase to £29,385 was announced for April 2026, it is set to be frozen at that level for three years from 2027. This freeze means that as graduates' salaries increase, a larger portion of their income will be subject to repayment, a phenomenon known as fiscal drag. For some, this means they will start repaying the loan earlier than anticipated or have a larger chunk of their pay deducted.
Many graduates reported that the repayment terms were initially presented as comparable to a mobile phone contract. However, outstanding balances have surged, with some exceeding £100,000, often growing faster than repayments. New data indicates that approximately four-fifths of graduates have seen their loan balances increase, while only about 17.4% have seen a decrease.
The Treasury Committee report specifically condemned the use of RPI for calculating interest, advocating for the lower Consumer Price Index (CPI) instead. While a 6% interest cap is in place for Plan 2 and 5 loans, the report notes it primarily benefits those who can repay their loan in full. The committee also highlighted that past and present governments have repeatedly frozen the repayment threshold despite promises not to.
Allegations of Mis-selling
The report details three primary instances where the government is accused of mis-selling student loans. Firstly, the Department for Education (DfE) allegedly used promotional materials comparing monthly loan repayments to costs like mobile phone contracts or cinema tickets, which did not accurately reflect the potential repayment amounts for high earners. Secondly, the DfE produced videos and presentations that failed to disclose the government's ability to retrospectively alter loan terms and conditions. Thirdly, the Student Loans Company (SLC) did not sufficiently clarify during the application process that rule changes could occur after the loan was issued.
Despite these findings, the government cannot be held legally liable for mis-selling due to an exemption from consumer protection laws. However, the report states that "No government should ever have taken advantage of this exemption by pursuing lending practices that cause consumer detriment," adding that students have a right to expect the government to act as an exemplary lender.
Committee Recommendations
The committee has called for the government to reverse the decision to freeze the repayment threshold. Dame Meg Hillier, chair of the committee, emphasized that the report signals a need for urgent action, stating that "Patience has run out." She added that reversing the threshold freeze is a modest change that could significantly help repair trust between graduates and the government.
Furthermore, the DfE is instructed to ensure all promotional materials comply with financial watchdog rules. The report also suggests working with the SLC to include information on annual balance statements that indicates the potential amount of the loan that may be written off.
The government is not legally bound to implement the committee's recommendations. If the suggested changes are adopted, unfreezing the threshold would allow graduates to retain more of their monthly earnings and potentially remove some borrowers from the student loan repayment system entirely. The Student Loans Company acknowledged the report's contribution to the debate on student finance and stated its commitment to working with the Department for Education on any resulting actions.