Government mis-sold student loans to a generation, report finds
Let’s say you are approached with the offer of a financial product. The terms of that product are complex, but a colourful guide has been designed to talk you through the details. It is referred to throughout as a “loan contract”. Among the terms and conditions (we’ll come back to those) are claims about how this loan is different from other loans because it is “very unlikely to impact materially on an individual’s ability to get a mortgage”, and helpful comparisons to other monthly expenses suggesting repayments will be similar to a phone contract.
You sign the “contract” and take out the loan. A decade or so later, you are shocked to discover a number of disturbing realities. Despite making monthly repayments since your first-ever paycheque amounting to thousands of pounds, your balance is higher than when you first took out the product, thanks to the interest rate. Now that you’re getting ahead in your career and starting to earn semi-decent money, repayments are vastly more than you were led to anticipate and nothing like a phone contract. This major outgoing is, unsurprisingly, a fact the bank considers when assessing your eligibility for a mortgage, limiting the amount you can borrow.
Worse than any of that: the actual terms of the product have changed. You were told the income level at which you would start repaying would rise each year in line with average earnings. But now it has been frozen. Surely the terms of a “contract” cannot be changed partway through? Yet it turns out that not only is the lender allowed to unilaterally change the terms after the product has been taken out, but this does not even constitute “mis-selling”.
Why? Because the lender is the government. And the “contract” you signed was actually not a contract at all but “statutory in nature”, and thus not covered by contract law.
Welcome to the student loans scandal. The Treasury Committee yesterday (6 July) published its long-awaited report into the “broken” student finance system. It is particularly focused on Plan 2 loans taken out by students in England and Wales between 2012 and 2022, because these are the loans affected by the Chancellor’s decision in the autumn Budget to freeze repayment thresholds, effectively amounting them to an additional stealth tax. But also considers the sustainability of the system as a whole, having gathered evidence from experts and stakeholders across the higher education landscape. Its survey on people’s experience of the system received 52,000 responses, the vast majority from graduates. And in the understated way Committee reports of this nature often are, it is quietly scathing.
For those familiar with the intricacies of student loans – especially those with personal experience – the report covers some well-trodden ground. There’s a section on “unfair” interest rates that are significantly above the rate of inflation (RPI plus up to 3 percentage points, depending on income), making these loans virtually impossible to pay off for most graduates and meaning many will pay back much more than they initially borrowed. The argument that income-contingent interest rates which see the loans of higher-paid graduates grow faster are in some way “progressive” is torn down, with one witness noting this is neither an effective nor a fair way to subsidise lower-income graduates.
And the government’s continued use of the “statistically flawed RPI” measure of inflation is deemed “regrettable” (Committee-speak for outrageous), with the report noting that “from 2030, RPI will be merged with CPIH, but this will be of little consolation to students who have had their loans inflated by a flawed measure for in some cases almost two decades”. It adds that it recommended back in 2018 that the government switch to CPI, and is “disappointed” this recommendation has been ignored.
However, the interest rate is not the aspect that is most detrimental to the average graduate’s day-to-day finances. That would be the monthly repayments – repayments which are far more onerous than the advisory documents provided to university applicants were led to expect, which do impact mortgage eligibility, and which are higher than they would have been had the government not frozen the thresholds.
According to estimations by the Intergenerational Foundation, “the cumulative changes made within Plan 2 have increased expected lifetime repayments for average earners by £14,360.51”. They have also had an impact on the trust this generation has towards the government and institutions. One survey response reads: “I thought I understood the terms when I took it out but clearly I didn’t – oh wait, it’s because you changed the terms after I’d signed the agreement?!”; another: “I would be well within my rights to pursue legal action if any other institution had retrospectively changed the terms of loan.”
Those “terms” and the government’s ability to change them at will came under close scrutiny during the Committee’s evidence sessions. It transpired that “the Terms and Conditions referenced in the written evidence [provided by the Student Loans Company as evidence of the information it provided to prospective students] are actually a guide to the terms and conditions and not the full terms and conditions themselves”, and that the Student Loans Company at no point “actively provided students with the full terms and conditions of the loan”.
Nor did the Student Loans Company flag to applicants that the government retained the power to change terms and conditions retrospectively. This crucial information was not included in the “speedbumps” of the application process designed to ensure applicants had read and understood the terms, nor highlighted in the promotional materials.
just after the survey responses were published, she was clear that this sort of behaviour would not be possible with a normal regulated financial product. The government, she told me, technically couldn’t be guilty of “mis-selling”, but only because of the unique nature of these loans, and that there was “a real duty of care”. It is worth remembering that these products were being marketed to teenagers, with the encouragement of their schools, using resources from the Department for Education.
The Committee report is blunt in its assessment of how this and previous governments have exploited their position: “The government has exempted its student loan policies from consumer protection laws and cannot be held liable in law for mis-selling. No government should ever have taken advantage of this exemption by pursuing lending practices that cause consumer detriment. Students have a right to expect that government acts as an exemplary lender. Successive governments have undermined that expectation.”
It continues: “Both the Department for Education and the Student Loans Company have produced promotional materials that did not fully reflect the costs of student loan repayments for higher earners. Nor did they sufficiently communicate that government can retrospectively change the terms and conditions of the loans. This amounted to mis-selling.”
On the specific point of frozen threshold, it recommends that this should be immediately reversed. The government, it argues, has “a moral obligation to deliver this modest fiscal reversal not only to maintain students’ trust in government, but to honour the terms and conditions under which those loans were sold to students”. It estimates this would cost the Treasury £355 million.
Fixing the broader issues with the system will be far more expensive. Reducing the interest rate, as campaigners across the political spectrum have called for, and making payments more manageable would have different impacts on individual graduates depending on their earnings, loan balances and where they are in their career. Various proposals put forward by different parties and the campaign group Rethink Repayment have been analysed by the Institute for Fiscal Studies, and come with price tags up to £70bn (which would not include simply writing off the loans). These proposals were not analysed by the Committee. But this report is still a pivotal moment in the story for three reasons.
First, MPs have at last put the student loans issue on the parliamentary radar. The government is not required to accept the recommendations, but the Treasury Committee’s interest in this subject is a sign that MPs are taking note (perhaps because so many of the 2024 intake are themselves on Plan 2 loans).
Second, it is the first time the issues around what would in any other sphere be a mis-selling scandal have been outlined in such stark terms, using the evidence provided by government departments and the Student Loans Company. It may be little consolation to existing graduates, but one of the recommendations is that “future student loans should be issued as contractual agreements rather than as agreements governed by statute, to prevent future governments from changing the terms and conditions of the loans retrospectively to the detriment of the borrower without paying compensation”.
Finally, the report exposes a fundamental flaw with the system as it stands versus how it was intended. Sir Vince Cable, back when he was Secretart of State for Business Innovation and Skills in the coalition government, told the House of Commons that the Plan 2 changes would result in the state funding 40 per cent of a degree, with 60 per cent coming from the individual, acknowledging that higher education benefits society as well as the student. It is impossible to know exactly how much the government subsidy will be as it depends on the graduates’ lifetime earnings. But a decade and a half later, analysis shown to the Committee estimated that graduates are bearing 95 per cent of the cost.
“Although balancing the books today is important, the government cannot always choose the politically convenient option of loading additional fiscal burdens on to younger generations while hoping that young people will not notice the extra weight for decades to come,” warns the Committee. Getting into the convoluted situation we are faced with today was a choice – a choice the government made in 2012, and which successive governments have stuck by, perhaps hoping that the young people being unfairly burdened would not notice their predicament until it was someone else’s job to fix it.
They are noticing now. A generation has been exploited by governments claiming to be acting in their best interests. This isn’t going away – whoever is prime minister.