MPs to investigate ‘unfair’ student loan interest rates

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MPs have launched an investigation into interest rates on student loans amid widespread discontent with the repayment terms.

The Treasury Select Committee, a cross-party group of MPs, said they would look into how interest rates and repayment thresholds burdening graduates as increasing numbers express dissatisfaction with the terms of their loan.

Dame Meg Hillier, chairman of the committee, said: “There are questions over whether decisions such as freezing the threshold for repayments is placing the burden unfairly on younger people.”

The inquiry comes after Rachel Reeves froze the threshold at which Plan 2 graduates begin to repay their debts at £28,470. This will be frozen for three years from 2027, a decision that has been criticised by campaigners, graduates and MPs alike.

Workers earning £30,000 would pay £55 a year more by 2029-30 under the freeze, while those earning £40,000 or above would pay £170 more, according to calculations by the Institute for Public Policy Research think tank.

Analysis published on Wednesday revealed that the number of graduates with student loan debts of more than £100,000 has soared by 60pc in just a year.

The highest single student loan debt stood at £314,000, a Freedom of Information request by comparison website Compare the Market found.

Kate Osborne, Labour MP for Jarrow and Gateshead East, told The Telegraph: “Freezing repayment thresholds during a cost of living crisis is taking money directly out of graduates’ pockets and I know from speaking to my constituents that this is leading to huge financial stress.”

Figures from the Student Loan Company (SLC) found that more than 179,000 graduates had a six-figure outstanding balance as of January this year, with more than 8,000 owing more than £150,000.

This has risen from the 113,000 graduates whose balances had crossed the £100,000 threshold by January 2025.

More than 2.8 million graduates owe more than £50,000 on their student loans, with the average loan balance when repayments start now at £53,010.

Although Plan 2 debt is written off after 30 years, high interest rates mean graduates must on average earn around £66,000 a year before they start to reduce the initial loan balance.

Interest is added at the rate of Retail Prices Index (RPI) inflation – currently 3.2pc – for those with income up to £28,470, and at RPI plus 3pc for those with income above £51,245.

Borrowers make repayments of 9pc of their salary above the £28,470 threshold.

Dame Meg said: “This inquiry is about fairness. Fundamentally, what we’re asking is, have the goalposts been moved in a way which is unfair to graduates?

“It’s critical that the model for financing university education is sustainable but there are questions over whether decisions such as freezing the threshold for repayments is placing the burden unfairly on younger people.”

Evidence can be submitted until April 14. The inquiry will also look into whether the incomes of higher-earning graduates should be used to subsidise the loans of lower-earning graduates.

Amira Campbell, president of the National Union of Students, said the investigation was “the clear result of sustained pressure from students and graduates”.

“No graduate should be financially penalised by retroactive changes to contracts that they signed when they were 17,” she added.

The Chancellor told the Treasury Select Committee on Wednesday that inflation was one of the main issues for graduates.

She said: “One of the challenges over the last two years is that inflation has been at too high a level. We reached just over 11pc under the previous government.

“Every time we get inflation down, we are reducing the interest charged on student loans.”

Last week Labour backbenchers backed calls for the student loan repayment threshold to be raised to £33,396.

The Good Growth Foundation (GGF), a Left-leaning think tank, said raising the salary threshold at which repayments start, and cutting the repayment rate from 9pc to 6pc, would save graduates on Plan 2 loans £400 a year.

Ms Osborne supported the GGF’s proposals but said that reform should go further: “We should abolish tuition fees in full to boost social mobility and benefit society enormously.”

Nearly £21bn is loaned to around 1.5 million higher education students each year in England, according to government figures. The current outstanding student loan debt totals more than a quarter of a trillion pounds, with the Chancellor expected to earn £40bn in interest payments by the end of this Parliament.

Kemi Badenoch, leader of the Conservative party, pledged to abolish real interest rates on Plan 2 loans, which force many graduates to pay tens of thousands more than they initially borrowed.

Sajni Shah, of Compare the Market, which obtained the data from the SLC, said: “With the continued rise in living costs making essentials like rent, utility bills and commuting increasingly expensive, careful budgeting is key for graduates starting out in their careers.”

A government spokesman said: “We inherited the student loans system, including Plan 2, which was devised by the previous Government. Threshold freezes have been introduced to protect taxpayers and students now, alongside future generations of learners and workers.”

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