The Treasury Committee gets nowhere near the real issues with student loans

Well that’s two hours I won’t be getting back.

Jim Dickinson

Jim is an Associate Editor (SUs) at Wonkhe

Setting the scene

The session opened with Yuan Yang MP (Labour, Earley and Woodley) asking Jacqui Smith which parts of the student loan system she considered most unfair – a generous opener that allowed Smith to immediately pivot to the one thing the government has actually done – capping Plan 2 interest at 6% ahead of this academic year.

The cap, Smith explained, was taken “in the context” of potential inflationary pressures from the Middle East. The logic being that it would have been unfair if rates had risen to the 7.1 per cent they would otherwise have reached.

Yang might have followed up asking whether that concern re inflation was extending to the funding pressures universities and students will face this winter.

Instead, she followed up by noting that changing the interest rate doesn’t change monthly repayments at all, and therefore primarily benefits the highest-earning graduates who repay in full. Did the Treasury make a judgment about which groups of graduates it wanted to benefit?

Rigby’s answer – no, it was “a reaction to the position in the Middle East.” She then acknowledged that in an ideal world she’d like to change quite a lot about the system – before returning to fiscal responsibility as the binding constraint.

The committee accepted this and moved on. The question of why, if you’re going to spend money on this, you’d choose the lever that disproportionately helps the well-off was not pursued.

Fair, but fair to whom?

Dame Harriett Baldwin MP (Conservative, West Worcestershire) pushed on interest rates – noting that she hadn’t actually heard Smith say 6 pere cent was fair, only that 7.1 per cent would have been unfair. Smith held the line – 6 per cent was fair “in the context” of capping it.

Baldwin also put the threshold freeze to Rigby – observing that it amounted to £7.5 billion being asked of students “in one move of the pen.” Rigby responded by listing other spending priorities – lifting the two-child cap, free breakfast clubs, free childcare. This is now the standard government response to any student finance question, and it was no more illuminating here than it has been anywhere else.

Baldwin did land one useful blow, noting that reducing the interest rate – the one thing the government has done – happens to be the reform that benefits the graduates least disadvantaged by the current system. Rigby acknowledged that in passing but the session moved on before the implications were examined.

The rebrand question

Jim Dickson MP (Labour, Dartford, not me) asked whether calling the product a “graduate contribution” rather than a loan might ease the psychological pressure that came through so powerfully in the survey evidence.

Smith’s answer was essentially – it’s still a loan because you borrow money and are expected to repay it. She also noted that NUS representatives in an earlier session had themselves said rebranding alone wasn’t the answer.

Dickson suggested that annual statements might at least include a projected write-off figure so borrowers could see how much of the balance they were actually expected to pay.

Smith worried about individual projections being misleading given the complexity of how lifetime repayments interact with earnings trajectories. That doesn’t stop pensions firms doing something similar in reverse, but it’s not something Smith had thought through.

The 2018 déjà vu moment

Dame Meg Hillier, chairing, pressed Smith on why the government’s evidence to the committee described the student loan system as “broken” when the Skills and Further Education white paper published last October had contained no such language.

Smith said the white paper did address reform – and that the system’s brokenness predated the threshold freeze. Hillier noted the “change of tone” drily and moved on.

John Glen MP (Conservative, Salisbury) raised something more specific. At the November 2025 Budget, the government announced that the Plan 2 repayment threshold would be frozen for three years from April 2027. That at least appeared in the Red Book, in a single subordinate clause buried alongside the income tax and NI threshold freezes.

What was not mentioned anywhere in the Budget documents was that the interest rate taper thresholds were also being frozen for three years. Those thresholds determine what rate of interest Plan 2 borrowers pay – below the lower threshold it is RPI only, above the upper threshold it is RPI plus 3 per cent. Freezing them while earnings rise pulls more graduates into the higher interest band through fiscal drag alone.

The IFS spotted the omission after the Budget and flagged it explicitly. The measure was nonetheless scored – bundled into the repayment threshold costing – and carries a material Exchequer yield.

Glen put it to Rigby that a change of that scale not being declared in the Budget document “doesn’t do the government or the Treasury any credit.” Rigby said she would come back in writing.

Distributional effects

Yuan Yang MP returned with what could have been the session’s central thread – the distributional question of whether the current cost-share between graduates and the state is appropriate, and whether the Treasury had any in-principle view on what the right ratio should be.

Rigby’s answer – that she’d push for change if fiscal space existed – contained no specifics. When Yang pressed further on whether the current individual contribution was too high, too low, or about right, Rigby declined to say.

Smith offered a figure – government’s overall contribution to higher education was “in the region of 35 to 40 per cent,” taking into account the write-off component of the loan book and the Strategic Priorities Grant. MPs didn’t seem especially interested in which Plan that might apply to, and whether it’s “fair” for the government to fiddle with the terms when repayments are less healthy than it anticipated.

The answer also elided the original stated 60/40 split that underpinned the 2010 reforms, the IFS’s estimate that the taxpayer now bears approximately 3 per cent of the total financing cost for the 2022 cohort, and the fact that for that cohort the effective RAB charge has turned negative – meaning the government expects a net return rather than contributing a subsidy.

Swallow’s social mobility

Peter Swallow MP, guesting from the Education Select Committee, asked Smith to consider two students from his constituency – one whose family can pay upfront, one who cannot – and put it to her directly that the surcharge on the income of the loan-funded student, for potentially decades, is a barrier to social mobility.

Smith acknowledged this was true of any loan-based system, and suggested that the only way to avoid it would be a fully grant-funded system – which would cost more and potentially mean fewer people going to university. The lack of imagination was palpable.

Swallow’s framing – that two students entering the same job on the same salary face meaningfully different disposable incomes for the duration of their working lives depending entirely on whether their parents had capital – is a decent version of the intergenerational argument. The wealthiest entrants are increasingly opting out of the loan scheme entirely. As that trend continues, the cross-subsidy mechanism that gives the system its progressive character is progressively hollowed out. This was not picked up either.

What wasn’t asked

The session lasted roughly two hours. In that time, neither minister was asked about the three incompatible accounting systems through which student loan policy is made – and the structural incentive those systems create to keep graduate repayment terms tight regardless of fairness.

Neither was asked about the £5.6 billion one-off accounting gain from the November 2025 threshold freeze, booked in 2026–27, and whether ministers were advised of its size before the decision was taken. Neither was asked about the RAB charge on Master’s loans being approximately minus 20.6 per cent – meaning the government expects to profit from the scheme – while charging borrowers RPI plus 3 per cent.

Neither was asked about Audit Wales’s finding that actual repayments were running at around 50 per cent of those forecast, or when the Treasury and DfE became aware of the divergence. Neither was asked about the perverse incentive created by using Public Sector Net Financial Liabilities as the fiscal rule metric – which, as the IFS has explicitly warned, structurally favours keeping the loan book’s modelled value high, which means keeping graduate repayment terms tight.

Neither was asked about the earnings model having no variable for franchised versus directly-delivered provision, and the write-downs that will materialise as franchised graduates’ actual earnings enter the training data at scale.

The session did establish that ministers find the system imperfect but fiscally constrained. It also established that Rigby and Smith are across the basic parameters well enough to avoid being pinned down on any of them.

What it did not do is put to the government the questions that cannot be answered with “fiscal responsibility” and a list of other spending commitments. Those questions are about mechanics, not ideology – about why the accounting system creates incentives that are structurally misaligned with graduate welfare, about who decided that graduates rather than taxpayers absorb the risk when earnings projections prove wrong, about what principle governs the asymmetric application of the interest rate formula, about whether parliament was ever given the opportunity to debate a cost-share that has moved from 60/40 to approximately 100/0 without a single explicit decision to that effect.

The committee says it aims to report before the summer recess. Smith and Rigby left the session looking relaxed. It’s unlikely the final report will generate much of a sweat.

Wonk Corner | 10/06/26