The Treasury is considering plans to raise the threshold at which graduates start paying back their loans but there are concerns that the move will not be enough to quell the growing concerns of Labour MPs.
The government has faced pressure to act after Kemi Badenoch, the leader of the Conservatives, began campaigning on the issue. Badenoch said the system had become a “debt trap” for graduates.
The government is looking at two main options — increasing the threshold for loan repayments and cutting interest rates — after warnings that many recent graduates are facing crippling charges on their debt.
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A Treasury source said that all options were under review and the government wanted to take time to get it right. The source said there was no silver bullet because the student loan system was “broken” by the Conservatives.
Rachel Reeves, the chancellor, announced in the budget that Labour will freeze the student loan repayment threshold of £28,470 until 2030.
The move, in effect a stealth tax, will lead to students paying more as incomes rise but the threshold remains frozen.
Rachel Reeves, the chancellor
YUI MOK/PA
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Students who graduated between September 2012 and July 2023 and are on Plan 2 loans are the worst affected, paying, on average, almost 10 per cent of their salary above the £28,470 threshold each year in loan charges, with interest of more than 6.2 per cent.
The government is looking at raising the threshold in line with inflation, a move that would cost about £1 billion.
However, a government source said that ministers are concerned that it will not be enough. “This is a broken system we inherited from the Tories,” they said. “The worry is that, while this will help graduates, it won’t be enough.”
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Other measures are likely to be significantly more costly. Measures could include switching from using the outdated RPI (retail prices index) inflation to the official index of CPI (consumer prices index). Ministers could also opt to introduce a lifetime cap on the total amount of interest that a graduate can repay.
Previous research by the Institute for Fiscal Studies found that introducing an interest rate equal to the CPI measure of inflation would cost the government about £2 billion per year and reduce the lifetime repayments of the highest-earning 20 per cent of graduates by £33,000 on average.
When Plan 2 was introduced, it was promised that the threshold would rise with average graduate earnings.
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There is growing discontent among Labour backbenchers over the issue. Ministers have warned that the party could be “outfoxed” by its opponents unless they get a grip on the situation. Lucy Powell, the deputy leader of the party, called the loans “egregious” and “unfair”.
Chris Hinchliff, the Labour MP for North East Hertfordshire, called on Starmer to reform the “absolutely broken” system. He is in £50,000 of debt — £10,000 more than he owed when he left university in 2015.
Some graduates have said they are struggling to get mortgages because banks have been taking into account their repayment burden when deciding how much they are prepared to lend.
Downing Street said the government will take time to consider potential measures to address the issue.
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“We’re taking the time to review how we can make the broken system fairer,” the prime minister’s official spokesman said. “It is an incredibly complex system, so making sure any changes don’t exacerbate the existing issue is important.”
In response, the Department for Education and the Treasury said they were discussing the issue.