Let’s say you are approached with a financial product offer. The terms of that product are complex, but a colorful guide has been created to talk you through the details. It is referred to throughout as a “credit agreement”. Among the terms and conditions (we’ll come back to them) are claims about how this loan is different from other loans because it’s “very unlikely to materially affect an individual’s ability to obtain a mortgage” and helpful comparisons to other monthly expenses that suggest repayments will be similar to a phone contract.
You sign the “contract” and get the loan. A decade or so later, you are shocked to discover a series of disturbing realities. Despite making monthly payments since your first 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 moving forward in your career and starting to make semi-decent money, the payouts are a lot more than you thought and nothing like a phone contract. This large departure is, surprisingly, a fact that the bank takes into account when assessing your suitability for a mortgage, limiting the amount you can borrow.
Worst of all: the actual terms of the product have changed. You were told that the income level at which you would start paying would rise each year in line with average earnings. But now it is frozen. Surely the terms of a “contract” cannot be partially changed? However, it turns out that not only is the lender allowed to unilaterally change the terms after the product has been removed, but this does not 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 loan scandal. The Treasury Committee published its long-awaited report on the “broken” student finance system yesterday (July 6). 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 making them a hidden additional tax. But it also considers the sustainability of the system as a whole, having gathered evidence from experts and stakeholders across the higher education landscape. Its survey of people’s experience of the system received 52,000 responses, the vast majority from graduates. And in the way that Committee reports of this nature are often understated, they are eerily silent.
For those familiar with student loan complications – especially those with personal experience – the report covers some well-trodden ground. There is 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 repay for most graduates and meaning many will pay far more than they originally borrowed. The argument that income-contingent interest rates, which see higher-paid graduates’ loans grow faster, are somehow “progressive” has been debunked, with one witness noting that this is neither an effective nor fair way to subsidize lower-income graduates.
And the government’s continued use of the “statistically flawed RPI” inflation measure is deemed “deplorable” (committee talk wild), with the report noting that “from 2030, RPI will merge with CPIH, but that will be of little consolation to students who have had a few instances of single-rate loan increases for several years”. He adds that he recommended as early as 2018 that the government switch to CPI and is “disappointed” that 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. These would be the monthly payments – payments which are much more difficult than the advice documents provided to university applicants expected, which I DO affect mortgage eligibility and which are higher than they would have been had the government not raised the thresholds.
According to estimates by the Intergenerational Foundation, “cumulative changes made within Plan 2 have increased expected lifetime repayments for average earners by £14,360.51”. They have also influenced the trust that 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, because you changed the terms after I signed the agreement?!”; another: “I would have my right to pursue legal action if some other institution had retrospectively changed the terms of the loan.”
These “conditions” and the government’s ability to change them at will came under close scrutiny during the Committee’s evidentiary hearings. It emerged that “The terms and conditions referred to in the written evidence (provided by the Student Loan 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 at no time did the Student Loan Company “actively provide students with the full terms of the loan.”
Nor did the Student Loans Company tell 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 that applicants had read and understood the terms, nor was it highlighted in promotional materials.
When I interviewed Committee Chair Meg Hillier once the survey responses were released, it was clear that this type of behavior would not be possible with a normal regulated financial product. The government, she told me, could not technically be at fault “mis-selling”, but only because of the unique nature of these loans, and that there was “a genuine duty of care”. It is worth remembering that these products were marketed to teenagers, with the encouragement of their schools, using resources from the Department of Education.
The Committee’s report is emphatic 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 legally responsible for mis-selling. No government should ever have taken advantage of this exemption by pursuing lending practices that cause consumer harm. Students have a right to expect successful government action. It undermined that waiting.”
He continues: “Both the Department of Education and the Student Loan Company produced promotional materials that did not fully reflect student loan repayment costs for higher earners. Nor did they adequately communicate that the government can retrospectively change loan terms and conditions. This led to mis-selling.”
At the specific freezing threshold point, it is recommended that this be returned immediately. The government, she argues, has “a moral obligation to provide this modest fiscal change not only to maintain student confidence in government, but to honor the terms and conditions under which those loans were sold to students.” It estimates this would cost the Treasury £355 million.
Fixing more extensive issues with the system will be much more expensive. Lowering the interest rate, as activists across the political spectrum have called for, and making payments more manageable would have different impacts on individual graduates depending on their earnings, credit balances and where they are in their careers. Various proposals put forward by various parties and the Rethink Repayment campaign group were analyzed by the Institute for Fiscal Studiesand come with price tags of up to £70bn (which won’t just include debt repayments). These proposals were not analyzed by the Commission. But this report is still a pivotal moment in history for three reasons.
First, MPs have finally put the issue of student loans on the parliamentary radar. The government is not required to accept the recommendations, but the Treasury Committee’s interest in the subject is a sign that MPs are taking note (perhaps because much of the 2024 intake is itself in Plan 2 loans).
Second, it is the first time that matters surrounding what would otherwise be a mis-selling scandal have been described in such stark terms, using evidence provided by government departments and the Student Loans Company. It may be of little comfort to existing graduates, but one of the recommendations is that “future student loans should be made as contractual arrangements rather than statutory arrangements, to prevent future governments from changing the terms and conditions of loans retrospectively to the detriment of the borrower without paying compensation”.
Finally, the report exposes a fundamental flaw with the system as it stands compared to how it was intended. Sir Vince Cable, when Secretary of State for Innovation and Business 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, recognizing 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 graduate’s lifetime earnings. But a decade and a half later, the analysis shown to the Committee estimated that graduates are shouldering 95 percent of the cost.
“While balancing the books today is important, the government cannot always choose the politically expedient option of placing an additional fiscal burden on younger generations, hoping that young people will not notice the extra weight for decades to come,” the Committee warns. Getting into the predicament we face today was a choice – a choice the government made in 2012 and which successive governments have stuck with, perhaps hoping that unfairly burdened young people 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 who claim to be acting in their best interests. This is not going away – whoever is prime minister.
(Further reading: The false promise that sparked the student loan crisis)
