Government to improve student loan guidance but rejects contractual terms

University students taking out student loans are to be warned that the terms and conditions could change so they are better informed about what they are signing up to, the government has said.

In July, a report by MPs said slideshows that compared student loan repayments to the cost of a mobile phone contract, and YouTube videos that did not mention the fact that conditions could be altered amounted to mis-selling by the government.

The Treasury committee’s investigation followed a furore last November when the then chancellor, Rachel Reeves, announced that the repayment threshold on plan 2 loans in England would be frozen at £29,385 for three years from April 2027. The threshold is currently £28,470 for this plan.

Some students had been led to believe that the thresholds would rise in line with inflation each year.

The committee’s report said the government had a “moral obligation” to reverse the freeze to maintain students’ trust and honour the terms under which the loans were sold to them.

In its response, published on Sunday, the government acknowledged the difficulties faced by graduates repaying loans, and said it kept “all aspects of the student finance system under review”, but did not commit to any change in policy.

It said it would redesign the guidance for new students to make it clear and unambiguous.

However it rejected the committee’s recommendation to issue new loans on a contractual basis so that terms could not be changed at a later date, saying it needed to be able to adapt the system to changing economic circumstances in order to keep taxpayers’ contributions stable.

In August, 121 MPs and peers from across party lines signed a letter to the new chancellor, John Healey, calling on him to urgently review the repayment system.

The letter said the frozen thresholds combined with inflation-linked interest rates meant young teachers, nurses, engineers, and entrepreneurs were facing “historically high” effective marginal tax rates.

“For many middle-income graduates, the combination of income tax, national insurance, and student loan repayments means they see less than half of any hard-earned pay rise,” it said.

Responding to the government’s commitment to offer clearer guidance, the chair of the Treasury committee, Meg Hillier, said: “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.”

Hillier welcomed the fact that a reversal of the threshold freeze had not been ruled out.

“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.”

A government spokesperson said: “We are taking decisive action to improve the student finance system and break down barriers to accessing university, starting with improved and clearer guidance for those taking out loans.

“That includes increasing maximum maintenance loans, reintroducing targeted maintenance grants to expand opportunities for people from all backgrounds, and [we have] raised the repayment threshold for plan 2 loans for the first time since 2021.

“We will continue to look for ways to make the system fairer for students, graduates and taxpayers in a financially sustainable way.”