The Government has been accused of mis-selling student loans to more than 5.8 million borrowers after a parliamentary inquiry concluded ministers failed to properly explain the true cost of the repayment system.
The Treasury Select Committee published its findings on Tuesday, accusing the Department for Education (DfE) of misleading prospective students about how the loans work and describing official communications as “deeply problematic”.
MPs concluded that several Government communications “amounted to mis-selling”, while accusing ministers of choosing the “politically convenient option of loading burdens on to younger generations, hoping that they will not notice”.
The committee’s report increases pressure on Chancellor Rachel Reeves, who earlier this year defended the student loan system as “fair and reasonable”, with Labour MPs now calling for reforms.
The inquiry identified three separate ways in which the DfE and the Student Loans Company (SLC) misled prospective borrowers, including through explanatory YouTube videos and promotional material aimed at teenagers.
Officials compared monthly student loan repayments with the cost of a £14 mobile phone contract or a £10 night out, while other examples likened repayments to broadband subscriptions, cinema trips and the cost of drinking at home.
However, the committee heard evidence that graduates on higher salaries can face monthly repayments worth hundreds of pounds, with some borrowers saying their student debt had prevented them from securing a mortgage.
MPs also found students were not properly informed that the Government could change the terms and conditions of their loans after they had signed up, including altering the earnings threshold at which repayments begin.
The committee said such a provision would normally be made clear in a commercial lending agreement.
Government accused of mis-selling £213billion of student loans to 5.8 million borrowers
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Around 5.8 million students took out Plan 2 loans between 2012 and 2023, with the outstanding balance reaching £213billion as of March last year.
Borrowers begin repaying their loans once they earn £29,385 a year, with any remaining balance written off after 30 years.
Interest starts accumulating while students are still studying and is linked to the Retail Price Index, with graduates earning more than £52,885 paying RPI plus an additional three percentage points.
The Treasury has confirmed that interest rates will be capped at six per cent from September.
When Plan 2 loans were introduced in 2010, students were told the repayment threshold would increase each year in line with average earnings from 2016.
Rachel Reeves has frozen repayment thresholds until April 2030
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GETTYInstead, successive Governments froze the threshold between 2016 and 2018, again for four years from 2021 and, following Rachel Reeves’ Budget, it is now due to remain frozen until April 2030.
Treasury Select Committee chair Dame Meg Hillier said: “Our report is a signal to the Treasury and the Department for Education that this can no longer be ignored.
“Patience has run out.”
Dame Meg said ministers had acknowledged that the system was broken but had failed to prioritise reforms, calling on the Treasury to reverse the repayment threshold freeze to “repair trust”.
Shadow education secretary Laura Trott said Labour had made “a bad system even worse by freezing the repayment threshold”.
Labour MP Rachael Maskell, who represents York Central, said: “The student loans system has failed a generation of students.”
Luke Charters, the Labour MP for York Outer and a former Financial Conduct Authority regulator, said: “As a former FCA regulator who still pays off my own Plan 2 loan, I know mis-selling when I see it.”
The committee also recommended that the Government should hold itself to the same standards as private lenders, demonstrating “basic fairness and common decency” despite being protected from large-scale legal action unlike lenders involved in the car finance and PPI scandals.
MPs further recommended reforming university funding so that the Government pays half of the cost of higher education, with students contributing the remainder.
A Student Loans Company spokesman said the organisation takes its responsibilities seriously and would work closely with the DfE on any actions arising from the committee’s findings.
A Government spokesman said the inquiry “makes an important contribution to the debate” and “lays bare the confused and broken system inherited by this Government”, adding that ministers are working with the Student Loans Company to improve communications for prospective students.