Student loan update as Labour leaves door open to repayment U-turn after £200bn 'mis-selling' scanda

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Many graduates have seen their student loan balances grow or stay the same despite years of repayments

Labour has left the door open to scrapping a controversial freeze on student loan repayment thresholds, after MPs found that loans worth £200billion had been mis-sold to millions of graduates.

In a joint response from HM Treasury and the Department for Education published today, the Government declined to rule out reversing the freeze, stating instead that "all aspects of the student finance system" remain under review.

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

The response follows a damning report by the cross-party Treasury Select Committee in July, which concluded that the way student loans had been promoted to borrowers "amounted to mis-selling."

Decisions on repayment arrangements, the Government said, "must be considered alongside wider fiscal priorities, the long-term sustainability of the higher education funding system, and the need to ensure value for money for taxpayers."

The committee's inquiry focused on so-called "Plan 2" loans, which were taken out by English and Welsh students who began university between 2012 and 2023. Welsh students who started after that date are also affected.

When these loans were first introduced in 2010, the repayment threshold was designed to rise each year in line with inflation. However, successive governments have frozen it on multiple occasions since 2016.

The Treasury Select Committee found that the Department for Education and the Student Loans Company had misleadingly compared monthly loan repayments to the cost of a mobile phone contract.

Crucially, students were never clearly told that the terms of their loans could be rewritten retrospectively by future governments.

Many graduates have discovered that despite years of making repayments, their outstanding balance has either grown or remained unchanged due to the impact of inflation.

In its response, the Government acknowledged that "more can be done" to help borrowers understand the system. It confirmed that new guidance will make it more prominent that loan regulations can be amended by the Government and Parliament.

Dame Meg Hillier, chair of the Treasury Select Committee, described the commitment to update information for prospective students as "an important step forward" in righting "a historical wrong."

However, she added: "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."

Dame Meg noted that the Treasury had not ruled out reversing the threshold freeze, and urged the new Chancellor, John Healey, to act at the upcoming autumn Budget.

"I sincerely hope he will use his upcoming budget to give graduates some much-needed breathing space," she said.

At last year's Budget, then-chancellor Rachel Reeves froze the repayment threshold at £29,385, a move that Telegraph analysis found would cost the average graduate an additional £20,000 over the course of their career.

MoneySavingExpert founder Martin Lewis branded the Government's response "very disappointing," saying it "does little to help the millions of students already struggling with student loans."

Mr Lewis described the threshold freeze, due to take effect next April, as "immoral" because it amounts to "a negative retrospective change of terms to loan contracts students, often aged 18, signed up to."

"No commercial firm would ever be allowed to do that," he said.

The Government also rejected the committee's recommendation to switch from using the Retail Prices Index to the Consumer Prices Index when calculating student loan interest.

Proposals to bring student loan promotions under the Financial Conduct Authority's Consumer Duty protections were similarly dismissed.

Mr Lewis offered one "slim hope" for graduates: since the freeze was announced in a Budget, "it has to be undone in a Budget and therefore they are just waiting for the coming one to do that."

Sir Philip Augar, who chaired the independent review of higher education funding, told the committee that successive governments had altered loan terms in an "almost sneaky way."

"I don't think there were bad actors in this, but it's just each administration has made a small change," Sir Philip said. "You add them all together, you compound them and you get the current distorted situation."

A Government spokesman 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 raising the repayment threshold for Plan 2 loans for the first time since 2021."