Plan 2 student loan changes would leave millions with a bigger payslip

Millions of UK university graduates could soon have a payslip boost after MPs ruled the Government had a 'moral obligation' to u-turn on its student loan threshold plans.

As it stands, the Government is set to freeze the threshold at which student loans are repaid. This is instead of increasing with earnings annually.

Chancellor of the Exchequer, Rachel Reeves, confirmed last year that the Plan 2 student loan repayments are being frozen at £29,385 for three years from April 2027.

Graduates will pay nine percent of everything they earn above this. Ultimately, freezing this means any pay rises that take you above this threshold are not protected from the rising cost of living, whether increasing energy costs or the price of petrol.

Put in layman's terms, if your salary rises from £30,000 to £33,000 over the next few years with a frozen threshold, you would repay nine percent on a larger slice of your income. But if the threshold increased with wages, you'd repay less - or potentially nothing extra depending on your circumstances.

Now under brand new recommendations released on Tuesday (7 July) from Parliament's Treasury Select Committee, MPs said there is a 'moral obligation' to reverse this.

Student loans have been controversial since their inception, as this 2002 protest shows (Sion Touhig/Getty Images)

Plan 2 graduates and mis-selling

The freeze is mainly impacting Plan 2 graduates, which is everyone who started university between 2012 and 2022 at an English institution.

"Governments have taken the politically convenient option of loading burdens on to younger generations, hoping that they will not notice until future years," the report from MPs on the Treasury Committee states.

MPs said they found three occasions on which students were mis-sold in relation to their student loans.

They said that the Department for Education (DfE) produced YouTube videos and slides 'that did not disclose that the government could vary the terms and conditions of loans retrospectively'.

The department also was alleged to have 'produced promotional materials that emphasised a comparison between the monthly cost of student loan repayments and the monthly cost of a mobile phone or cinema tickets, which was inaccurate for higher earners'.

And the third finding was in relation to the Student Loans Company, which the committee says 'does not make it sufficiently clear in the loan application process that the government can retrospectively change the terms and conditions'.

"This fact is disclosed in the guide to student loans but is not done with any additional emphasis, as would be expected were this to be a commercial contract," they added.

The freeze doesn't take in to account other rising costs in life (Matt Cardy/Getty Images)

Will the Government unfreeze the student loan threshold?

There is no commitment to reverse the freeze as it stands. But things could change, especially in a world where we are set. to get a brand new Prime Minister in the coming months.

A government spokesperson said the report was an 'important contribution to the debate on improving the student finance system, and lays bare the confused, and broken system inherited'.

“It is vital students are given clear and accurate information so they can make informed decisions about their future and we are working closely with the Student Loans Company on communications to students,” they said.

Chair of the Treasury Committee, Dame Meg Hillier, said: “It is not common for a Treasury Select Committee, made up of MPs from the three largest parties, to agree that a specific Budget measure announced by a Chancellor must be reversed. Our report is a signal to the Treasury and the Department for Education that this can no longer be ignored. Patience has run out.

“Ministers openly accept that the system is broken and unfair but have said that it is not a priority to fix it. While I understand that there are many competing pressures on a government, reversing last year's threshold freeze is a modest change that would not eat up vast resources.

"Importantly, I believe it would go a long way to repairing the damage done to the trust between graduates and those responsible for overseeing the student loans system.”