Rachel Reeves on student loans isn’t even arguing with herself yet

The terms of reference are focused squarely on the graduate end of the system.

The committee wants to know whether interest rates above inflation are fair, whether the government should be able to change loan terms after the fact, whether the process around student loans provides enough information, and how loan repayments interact with marginal tax rates.

There’s a public survey asking graduates whether they’d take out the loan again and whether repayments are having a material impact on their financial planning.

Committee Chair Dame Meg Hillier framed it as follows:

This inquiry is about fairness. Fundamentally, what we’re asking is, have the goalposts been moved in a way which is unfair to graduates?

Ah yes, fairness. Starmer has been criticised throughout his premiership for a lack of overarching political vision, but to the extent that one exists, fairness pops up in each “reset”.

It runs through conference speeches, the justifications for difficult decisions, and the language used to defend everything from the two-child limit removal to windfall taxes. Hillier isn’t daft.

Several of the questions are pointed. Question 3 asks whether it was fair for the government to block interest rates from going negative when the index the loan was pegged to went negative. Question 6 asks whether terms should be changeable after the loan has been taken out.

Question 9 asks whether doing so erodes trust in government. Question 11 – with an amusing edge – asks whether there are examples of government unilaterally changing the terms of finance provided to companies, pensioners, or other groups.

It’s almost like she knows the answer already.

As John Blake, director of the Post-18 Project, has pointed out, it’s all a bit like commissioning a thorough investigation into whether your mortgage payments are fair while declining, on principle, to discuss the house.

So how might all of this play out? Jim Dixon MP asked Rachel Reeves about student finance during the 11 March Treasury Committee session on the Spring Statement. Her answers suggest didn’t scream that change is coming.

“The previous government froze the threshold on Plan 2 student loans for 10 years”

First we got the “they did it first” defence. It’s misleading on the timeline – the Plan 2 threshold was frozen at £21,000 for six years, then uprated, then frozen again at £27,295 for three years – but more importantly, it is an odd line coming from a Chancellor whose own November 2025 Budget announced a fresh three-year freeze on Plan 2 thresholds from April 2027.

As I set out earlier this week, the pattern across five years of accounts is now clear – when the Treasury’s model shows that graduates are earning less than predicted and the loan book is deteriorating, chancellors don’t accept the loss or try to improve graduate outcomes. They freeze or lower the repayment threshold, which makes the model predict higher future repayments, which makes the loan book look more valuable on paper, which improves the fiscal position by billions.

“We’re also freezing tax and national insurance thresholds as well”

Volunteered as though it were a defence, this is an own goal. A graduate earning above the Plan 2 repayment threshold already faces a marginal deduction rate of over 42 per cent once income tax, National Insurance and loan repayments are combined. By reminding the committee she’s also freezing income tax and NI thresholds, Reeves was conceding that her government is squeezing graduates from multiple directions simultaneously – and describing that as a justification rather than a problem.

“Every time we get inflation down we are reducing the interest charged on student loans”

Monthly repayments are 9 per cent of everything above the threshold. They are not affected by the interest rate at all. Lower inflation reduces the rate at which the headline debt figure grows, but for most Plan 2 borrowers who won’t clear the balance before the 30-year write-off, it changes nothing about what they actually pay. Worse, Reeves has simultaneously frozen the interest rate thresholds – and the IFS has shown that the interest-threshold freeze accounts for more than a third of the increase in average lifetime repayments for the 2022 cohort.

“We’ve reintroduced maintenance grants for students from low-income families”

At the time of testimony, grants have been announced but not delivered. They were pledged at Labour Conference in September 2025 for introduction “by the end of this Parliament” – 2029. They’ll disappoint at precisely the time they need to not – narrowly targeted at students from low-income households studying government priority subjects, funded by an international student levy.

“Any change would have to be fully costed and fully funded”

The £5.6 billion “fiscal improvement” the OBR scored from Reeves’ threshold freeze is a calculation of total extra repayments over the 30-year life of affected loans, discounted to present value. In any single year, the extra cash is a few hundred million at most, and the bulk sits in the 2030s and 2040s. What she means is – my little wheeze gave me £5.6bn in pretend money to play with next year.

“I just don’t accept the premise at any level at all that this government is not supporting young people”

That may be true, but the Green surge that is almost certainly coming at the local elections may indicate that young people don’t accept her premise at any level either.

The inflation problem

The bigger issue was the context in which the student loans exchange occurred. In the same hearing, Reeves was asked about the Iran-driven energy shock. She told the committee it would be “unwise to speculate” on the impact on inflation, but confirmed the Treasury was examining “a number of scenarios.”

The OBR’s David Miles had told the same committee the day before that if energy prices stay where they are, UK inflation could end 2026 at 3 per cent rather than the forecast 2 per cent.

It’s as if Reeves on loans and Reeves on Iran/inflation had never met. When it came to households facing higher energy prices, Reeves was active and interventionist – meetings with the CMA, work on price gouging, fuel finders, the energy price cap protecting consumers until June.

When it came to graduates facing the consequences of her own Budget decisions, the posture was passive – it’s for the Department for Education, it would need to be bid for in a future spending review, inflation is coming down.

But there’s a deeper irony. As I set out in the accounting analysis, higher inflation is terrible for graduates but temporarily brilliant for the Treasury’s loan book. When RPI is high, the loan book gets revalued upwards – and the partition between the RDEL charge (which counts against DfE’s day-to-day spending budget) and the financial transaction gets revised.

The in-year departmental spending charge goes down. In 2022-23, when inflation hit 13.5%, the student loan RDEL swung from a £6.6 billion cost to a £9.4 billion gain. The loan book had never looked healthier on paper – even as graduates were being crushed by the interest charges that same inflation was driving.

If the Iran crisis produces another inflation spike, the same mechanism kicks in. Graduate balances balloon, interest charges climb, the monthly experience of repaying a loan that never seems to shrink gets worse – but on the Treasury’s books, the loan book is revalued upwards, the partition shifts, the in-year RDEL charge falls, and the fiscal pressure to act on reform actually decreases.

To put it bluntly – when it comes to the student loan accounting, the Chancellor would love an inflation spike. It makes her numbers look better at exactly the moment graduates’ perception is getting worse.

Reeves’ argument that falling inflation helps graduates is not just unreliable in the face of geopolitical events – it conceals a system where the Treasury’s financial incentives and graduates’ lived experience are structurally misaligned.

It’s worth noting that the PM has gone further than the Chancellor. At PMQs on 25 February, Starmer told the Commons:

We inherited their broken student loans system. We’ve already introduced maintenance grants to improve the situation, which they scrapped, and we will look at ways to make it fairer.

He acknowledged that many graduates feel they are facing “a graduate tax that never ends” and said:

The idea of paying off a loan every month but seeing the balance increase is something we will look at.

His spokesman subsequently indicated that slashing interest rates and changing the repayment threshold may be considered by ministers.

Reeves, by contrast, has never used the word “fairer” in this context. Her trajectory has been from defending the system as “fair and reasonable” (late January, on LBC) to “broken” (late February, also on LBC) – but “broken” only in the sense of blaming the Conservatives for breaking it, not in the sense of accepting that her own Budget made it worse.

What happens next

The inquiry’s call for evidence closes on 14 April. The questions are good, the survey for graduates is welcome, and the mere fact that the Treasury Committee is treating this as a taxation question – which it increasingly is – rather than purely an education policy question is a step forward.

But the restriction on scope is a problem, and it intersects with the distributional question. The committee will hear extensive evidence that the terms of Plan 2 loans are unfair, because they are. It will hear that changing terms retrospectively erodes trust, because it does. It will hear that marginal tax rates for graduates are punishingly high, because they are.

And the interest rate questions in the terms of reference will naturally amplify the voices of higher-earning graduates for whom interest is the binding constraint. What it may not hear – because it has ruled it out of scope – is whether the whole architecture is even capable of being or feeling fair.