Next chancellor must scrap student loans three-year threshold freeze, MPs say

A cross-party group of MPs has called on the next Treasury chief to lift a three-year freeze on student loan repayment thresholds for graduates.

The House of Commons Treasury Committee also harshly warned in its latest report that the government’s actions amounted to a “mis-selling” of loans.

Ministers face significant criticism over their handling of graduate repayment terms, particularly affecting those with “Schedule 2” loans granted in England between September 2012 and July 2023.

During his October budget, the Chancellor froze the salary threshold for loan repayments for three years, starting in 2027.

From next year to 2030, graduates will need to repay 9% of everything they earn above £29,385.

This measure would likely leave graduates significantly worse off, as the repayment threshold would otherwise rise with inflation.

The Schedule 2 loan threshold was to be increased each year in line with inflation when it was first created in 2010, but has been frozen multiple times since 2016.

The Treasury Committee’s latest report said the student loan system “places stress” on people in their 20s and 30s that their parents and other previous generations did not face.

The committee said the younger generation should be the country’s “engine room” and described freezing the threshold as “a convenient option to impose additional financial burdens on younger generations in the hope that young people will not notice the extra weight in future decades.”

The committee said ministers should commit to reversing the freeze in the next budget, possibly in the autumn when a new government led by Andy Burnham comes to power.

Turning this around would cost £355 million by the 2029-30 financial year, MPs said, adding that a “modest financial return” would help maintain students’ confidence in the Government.

Dame Meg Hillier, Chair of the Treasury Committee, said: “It is unusual for a Treasury Select Committee, comprising MPs from the three largest parties, to agree that a particular budget measure announced by the Chancellor should be reversed. Our report is a signal to the Treasury and the Department for Education that this can no longer be ignored. Patience has run out.”

“Ministers openly accept that the system is broken and unfair, but have said fixing it is not a priority. “While I understand there are many competing pressures on the government, reversing last year’s threshold freeze is a modest change that will not consume huge resources.

“More importantly, I believe this will go a long way in repairing the damage to trust between graduates and those responsible for overseeing the student loans system.”

Elsewhere in the report MPs took aim at actions they said amounted to mis-selling, but added that the Government was immune from being held legally responsible for the mis-selling of loans.

He underlined three things:

The government announced earlier this year that this interest would be capped at 6% from September to protect graduates from rising inflation during the war in Iran.

Many graduates find that their debt balances have either increased or remained the same due to inflation despite years of repayments.

While the committee welcomed the interest rate cap as “a step in the right direction”, it said it would only benefit the highest-earning graduates who would repay their loans in full.

A Government spokesman said the MPs’ report “reveals the confused and corrupt system inherited by this Government”.

They added: “We are already taking decisive action – raising the repayment threshold in the last two years for the first time since 2021, capping maximum interest rates to protect graduates from rising costs and reintroducing maintenance grants to expand opportunities for people from all backgrounds.”

The spokesperson also said it was “vital that students are given clear and accurate information so they can make informed decisions about their future”, adding: “We work closely with the Student Loans Company on communication with students.”

A spokesperson for the Student Loans Company said the company recognized “the importance of ensuring students and borrowers have access to clear, accurate and timely information about student finance across all repayment plans”.

“We take this responsibility seriously and will continue to work closely with the Department for Education, including on wider actions arising from the report,” they added.