Student loans and taxation of graduates

The student loans system is complex. The terms and conditions of loans must be examined within the context of the entire system. The overall level of subsidy provided by the state to the individual is the defining factor in how the loan then operates. (Conclusion, Paragraph 17)

Although the government claimed that its subsidy is in the region of 30% to 40%, we saw evidence indicating that individual contributions from students graduating today could be as high as 95%. That was not what the government or Parliament intended, when Parliament agreed the Plan 2 legislation. Society benefits from individuals going to university. Therefore, society should contribute to the cost of an individual’s higher education. We agree with Sir Philip Augar that the split between state and individual should be around 50:50. Terms and conditions matter. Even a very clever system that strikes a generally acceptable balance between the taxpayer and individual contributions will not be sustainable in the long term, if individual terms and conditions within that system are deemed economically or politically intolerable by stakeholders or loan holders. (Conclusion, Paragraph 18)

In the long term, the government should return the balance between the individual and the state to a 50:50 split. (Recommendation, Paragraph 19)

Due to our remit, we have not scrutinised the relative value of different higher education courses. There may be valid arguments now and in the future about the proportion of costs borne by individuals and the state, depending on the relative value of courses to the state and the individual. Such arguments might bear further consideration by the Department for Education and the Education Select Committee. (Recommendation, Paragraph 20) 39 Is the student loans system broken or unfair?

The government has described the student loans system as unfair and broken; the other key stakeholders in the system, universities and students, have agreed. We also agree. The system, however well-intentioned, has resulted in most students never paying back their loan in full while engendering widespread dissatisfaction among graduates. It is untenable for the government to state publicly that the system is broken and unfair, but not take the necessary steps in successive Budgets to fix it. (Conclusion, Paragraph 29)

Intergenerational fairness is fundamental to maintaining a functional society. A responsible government would pay close attention to it. Ministers must decide where to spend and cut based, at least partially, on which portions of the population need help or can afford to carry more of the burden. The student loan system is layering stress on to people in their 20s and 30s in a way that did not apply to previous generations. The country needs the younger generation to be the engine room of Britain in the years to come. 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. (Conclusion, Paragraph 30) Interest rates

There is no definitive measure of what a fair student loan interest rate should be. The interest rate on each student loan plan must be considered within the context of the plan’s other terms and conditions. (Conclusion, Paragraph 41)

Considered in isolation, an interest rate much higher than inflation seems unfair, while an interest rate pegged to inflation that maintains the real- terms cost of a loan might seem fairer. If earnings fail to keep up with inflation, however, graduates become less well-off relative to their loan balance, as happened during the spike in inflation in 2022 and 2023. (Conclusion, Paragraph 42)

Progressive interest rates that are set higher than the rate of inflation increase the costs of higher education to high earners, but this may not seem fair to high earners who also pay higher amounts of income tax than graduates on lower incomes. (Conclusion, Paragraph 43) 40

The government’s current 6% cap on student loan interest is a step in the right direction for protecting Plan 2 loan holders. However, capping the rate at 6% rather than allowing it rise to 7.1% as implied by March’s RPI rate will benefit only students who will pay back their loan in full. It will have no impact on the majority of students because the majority have their loan written off before they finish paying it off. (Conclusion, Paragraph 44)

With its Plan 5 reforms, the previous government chose to replace income- contingent interest rates with rates pegged to inflation, which suggested that it considered income-contingent loans as problematic. Instead, it opted to shift the burden of paying for higher education slightly away from the highest earners towards all loan holders through longer repayment terms and lower repayment thresholds. (Conclusion, Paragraph 45)

It is regrettable that this government, along with all its predecessors, has continued to use RPI as its measure of inflation for student loans despite knowing it is statistically flawed. 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. (Conclusion, Paragraph 46)

We reiterate the recommendation of the then Treasury Committee in 2018: “The Government should abandon the use of RPI in favour of CPI to calculate student loan interest rates.” We are disappointed that eight years later this recommendation has not been implemented. (Recommendation, Paragraph 47) Consumer harms from changing terms and conditions and mis-selling

Governments both past and present have frozen the repayment thresholds of student loans, despite repeated commitments by government when the loans were taken out that that would not happen. (Conclusion, Paragraph 61)

The government has exempted its student loan policies from consumer protection laws. No government should ever have taken advantage of this exemption by pursuing lending practices that cause consumer detriment. Deciding to go to university, what to study and taking out a student loan is one of the most material financial decisions a young person will make in their life. Students have a right to expect that the government will act as an exemplary lender employing the highest levels of consumer care and protection. Successive governments have undermined that expectation. (Conclusion, Paragraph 62) 41

This government must reverse the repayment threshold freeze in the Autumn Budget. The annual additional borrowing from this policy would be £355 million by the fiscal rule target year 2029–30. The government 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. (Recommendation, Paragraph 63)

The government has exempted its student loan policies from consumer protection laws and cannot be held liable in law for mis-selling. However, we expect the government to comply with not only the law, but basic fairness and common decency. The way in which student loans have been promoted and communicated is deeply problematic: i) It was unwise of previous governments to claim that “a student loan is very unlikely to impact materially on an individual’s ability to get a mortgage.” Many people would interpret this statement as claiming that a student loan has no impact on mortgage affordability. The government relied on UK Finance for this quote, but the Department for Education remains responsible for the accuracy of its promotional materials. Dismissing the impact of a student loan on a mortgage application could be seen as a breach of the FCA Consumer Duty. ii) The Department for Education has produced YouTube videos and slides that did not disclose that the government could vary the terms and conditions of loans retrospectively. That amounted to mis-selling. iii) The Department for Education 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. That amounted to mis- selling. iv) The Student Loans Company does not make it explicitly clear in its “speedbumps” 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 emphasis, as would be required were this to be a commercial contract. That amounted to mis-selling. (Conclusion, Paragraph 82)

The Department for Education must in future ensure that all student loan promotional materials it authorises, endorses, or links to in its own materials are compliant with the FCA Consumer Duty or the FCA financial promotions regime, even if the Department is not legally required to do so. (Recommendation, Paragraph 83) 42

As no government can bind its successors, all government promotions should clearly state that “the future terms and conditions of your loan can be changed retrospectively by future governments”. The statement provided in some historic materials that “all policies are kept under review” is not sufficiently clear and in our view would amount to a breach of the FCA’s Consumer Duty. (Recommendation, Paragraph 84)

Future student loans should be issued as a contractual agreement 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. (Recommendation, Paragraph 85)

The Student Loans Company must explicitly make it clear in its “speedbumps” that the government can and does change the terms and conditions of the loans retrospectively after they are taken out. (Recommendation, Paragraph 86)

When asked about its compliance with the ‘red hand doctrine’, the SLC’s defence was that a student loan is not contractual, so it need not comply, and that in any case legal responsibility for its application forms actually lies with the Secretary of State for Education. When we asked Baroness Smith about previous mis-selling, however, she argued that the SLC had apologised. (Conclusion, Paragraph 87)

The Department for Education and the Student Loans Company need to both jointly and separately establish who is legally responsible for what. In particular, they must establish whether the student loan application form makes students sufficiently aware of the unusual terms of the loan, which allow the government to change terms and conditions retrospectively. (Recommendation, Paragraph 88)

The government’s written evidence to the Committee stated that individuals are required to sign a ‘loan contract’, whereas the Student Loan Company has told us student loans are not contractual. This contradiction must be resolved. (Recommendation, Paragraph 89) Loan versus tax

Most current student loan holders will never pay off their loan, which will function like a 30- or 40-year supplementary income tax. Many people told us that the debt acts as a psychological burden, unlike future income and national insurance taxation. (Conclusion, Paragraph 95) 43

While defining student loans as loans, the Teaching and Higher Education Act 1998 does not ban additional guidance being added to a student loan statement. We disagree with the government that additional information would confuse loan holders. There is potential for consumer detriment if people make voluntary repayments to pay off their student loan without fully understanding the benefits of having the loan written off. Any additional information that can be added to a student loan statement that increases loan holders’ awareness of the likelihood or possibility that they may not have to pay their loan off in full is likely to reduce confusion around student loans, not increase it. (Conclusion, Paragraph 96)

The Department for Education and the Student Loans Company should work together to design and implement wording that can be added to the annual statements giving students an approximate indication of how much of their total loan is likely to be written off. (Recommendation, Paragraph 97) 44