Government defends right to alter student loan terms, citing state subsidies
The government has insisted it is entitled to change the terms of student loans because the products are so heavily subsidised by the state that they bear no resemblance to commercial borrowing, as pressure mounts over the fairness of recent alterations. Lucy Rigby, the chief secretary to the Treasury, told MPs on Wednesday that for the majority of young people who want to go to university, “you couldn’t get a commercial loan because you don’t have the credit history, you don’t have the collateral, you certainly wouldn’t be able to get something which you could write off if you don’t hit certain repayment thresholds”. She added: “Student loans, despite having the name they have, are really very, very different as a product … to a commercial loan. Because they are so heavily subsidised by the government, the government has the right … to change some of those terms of the loan.”
The case for change: taxpayer fairness and system safeguards
Rigby emphasised that the government must balance the interests of graduates against those of the broader population, noting that less than half of young people attend university. “Fairness to taxpayers as a whole” had to be considered, she said. Her defence comes as ministers reject accusations that recent modifications to student loans were unfair. A government spokesperson said the current system was inherited from the previous administration, but steps had already been taken to make it fairer, including raising the repayment threshold for the first time since 2021 and capping maximum interest rates this year to protect graduates from rising costs. The spokesperson also pointed to the reintroduction of targeted maintenance grants for students from low-income households — funded by a levy on international student fees — as further evidence of support. Grants of this kind were abolished in 2016. “The system protects lower-earning graduates,” the spokesperson added, noting that repayments are linked to income and that any outstanding balance and interest are written off at the end of the loan term. Loans can also be written off if a borrower is permanently unfit for work or dies. The government argues that the combination of income-contingent repayment, long write-off periods and state subsidy means the loans cannot be compared to commercial credit, giving ministers the authority to adjust conditions.
How the loan system works — and what changed
The current row centres on “plan 2” loans, taken out by millions of students in England and Wales who began courses between September 2012 and July 2023. Under this scheme, graduates repay 9% of their earnings above a threshold currently set at £29,385. The catalyst for the latest controversy was Chancellor Rachel Reeves’s decision to freeze that threshold for three years, from April 2027 to 2030. Critics argue the freeze acts as a stealth tax, because as wages rise more graduates will be pulled into repayment and a larger share of their income will be subject to deductions. The interest rates applied to plan 2 loans also remain a flashpoint. These can range from the Retail Prices Index (RPI) measure of inflation to RPI plus three percentage points, depending on a graduate’s earnings. Many borrowers find that the interest added each month outstrips the amount taken from their wages, so their overall debt continues to grow. Some have described the rates as “extortionate” and “higher than my mortgage”. In response, the government has announced that from September 2026 the maximum interest rate on plan 2 and plan 3 loans will be capped at 6%, a move intended to shield borrowers from escalating costs driven by inflation. For students starting courses from August 2023, a new “plan 5” loan has been introduced with different terms: a 40-year repayment period and an interest rate capped at RPI inflation, which is seen as a more generous deal for high earners compared to plan 2.
Graduates’ grievances and claims of unfair treatment
Campaigners and student representatives have told the Treasury select committee, which is holding an inquiry into student loans and the taxation of graduates, that many graduates feel they are being used as “cash cows” to finance policies benefiting older generations, in particular the state pension triple lock. The guarantee that state pensions rise in line with inflation, average earnings or 2.5% – whichever is highest – is estimated to cost £15bn a year by 2030. Philip Augar, who led the 2019 government review into post-18 education, has described the changes to loan terms as “almost sneaky” and compared the situation to the mis-selling scandals surrounding payment protection insurance and car finance. Jacqui Smith, the minister for skills, rejected that comparison, telling MPs: “I think he is wrong … I don’t think this is equivalent to that.” Martin Lewis, the consumer campaigner, has said that altering loan terms “would not be allowed for any commercial lender – it would go against all forms of consumer law”. The Treasury committee’s call for evidence drew more than 52,000 responses. Some graduates claimed the interest rates were “extortionate” and “higher than my mortgage”, while others said they had been assured that repayment thresholds would rise with inflation and that many did not understand the terms and conditions of their loans before taking them out.
