Chancellor under fire for extending stealth tax on graduates, even as cross-party report finds £200bn student finance system amounts to mis-selling.
Rachel Reeves is facing demands to reverse a stealth tax she imposed on graduates last year, after a hard-hitting cross-party report found that student finance had been mis-sold to more than five million people, and that ministers are choosing to leave the injustice unaddressed.
The Treasury Select Committee’s report, published Tuesday, delivers a damning verdict on a system that now leaves graduates owing a combined £213bn, built up by roughly 5.8 million people who took out so-called Plan 2 loans between 2012 and 2023. While the mis-selling itself, including misleading comparisons of monthly repayments to a £14 mobile phone contract or a night out clubbing, stretches back to when the loans were first marketed, MPs were unambiguous that it is this Government’s choices now that are compounding the damage.
Chief among those choices is Reeves’s decision in last year’s Budget to freeze the income threshold at which graduates start repaying their loans for a further three years, until 2030, a move the committee says functions as a stealth tax on young workers already squeezed by the cost of living. Students were promised, when Plan 2 loans launched in 2010, that the threshold would rise annually in line with wages from 2016. Instead it has been frozen three times, and Reeves opted to extend that freeze again despite mounting evidence, laid out repeatedly to her own department, of the strain it places on graduates.
“The student loan system is broken. Far too many people are being pushed towards university and then leaving saddled with debt and poor job prospects.
“Labour has made clear that fixing the student loan system is not at the front of the queue. Instead, they have made a bad system even worse by freezing the repayment threshold.”
The committee’s own public survey drew more than 52,000 responses, one of the largest in its history, with over half of respondents saying they had not understood their loan’s terms before signing up. MPs also highlighted analysis suggesting today’s graduates could end up shouldering as much as 95 per cent of the cost of their degrees, far above the 50:50 split between student and state that the report says ministers should restore.
Dame Meg Hillier, the committee’s chairman, said patience had “run out” and accused ministers of admitting privately that the system was broken while refusing to treat fixing it as a priority. She said reversing the threshold freeze, which the committee costed at £355 million a year by the end of the decade, was a modest step that would go a long way towards repairing trust between graduates and the state. Notably, Hillier pointed out that it is highly unusual for a committee spanning all three main parties to unite behind reversing a named Budget measure.
For the Conservatives, the findings sharpen a case they have been making for months, that a Chancellor who publicly calls the system “fair and reasonable” chose, with full knowledge of the criticism building against her, to tighten the screw further rather than ease it. Laura Trott, the shadow education secretary, said the student loan system was “broken” and accused Labour of making a bad situation worse by freezing the repayment threshold rather than tackling the underlying unfairness. It is a charge that lands more heavily for being about a decision Reeves made herself, in office, with the evidence already in front of her, rather than one inherited from her predecessors.
Luke Charters, the Labour MP for York Outer and a former financial regulator who is still repaying his own Plan 2 loan, said the mis-selling was obvious to anyone with a regulatory background, describing a generation as having quietly accumulated debts they were never adequately warned about, an admission from within Labour’s own ranks that will do little to ease pressure on the Chancellor.
Unlike victims of the car finance and PPI scandals, graduates have no realistic route to mass legal redress against the Government, leaving political pressure as the main lever for change. The committee wants future loans issued as proper contractual agreements rather than changeable statutory instruments, so that ministers cannot alter terms without compensating borrowers, and it wants annual statements to give graduates a clearer indication of how much of their loan balance is ever likely to be repaid at all.
Interest on the loans, calculated using the widely criticised Retail Price Index measure, has also come under fire, though the Treasury acted earlier this year to cap the rate at 6 per cent from September, following years in which the formula added thousands of pounds to graduates’ balances.
The Student Loans Company said it took seriously its responsibility to give borrowers clear and accurate information, and would continue working with the Department for Education on any changes arising from the report. A Government spokesman said the committee’s findings exposed a “confused and broken system” inherited from its predecessors, and insisted officials were working with the SLC to improve how information is communicated to students, while stopping short of committing to reverse the threshold freeze that the committee says is central to the unfairness.
With pressure building from both sides of the House, the question for Reeves is no longer whether the system is broken, even she concedes that much, but why, having known this for months, she chose to make it worse rather than begin putting it right.
