Student loan crisis in England and Wales is a scam against graduates, MPs say

Labour backbenchers turn on Rachel Reeves as MP claims former students are stuck in a loans ‘Hotel California’

Angry backbench Labour MPs have attacked ministers over the student loans crisis, saying graduates are being “outrageously scammed”.

During a Commons Westminster Hall debate on Wednesday, several Labour MPs joined calls for an urgent shake-up of the “unfair” system, with one describing it as “an absolute dog’s dinner” and another likening the terms to something that a “loan shark” would offer.

Hours later, Keir Starmer promised to “look at ways” to make the student loans system “fairer”. The indications from Downing Street are that changes to the “plan 2” student loan interest rate and repayment threshold may be considered as ministers seek to make life better for graduates.

It comes days after the education secretary, Bridget Phillipson, said there were “problems” with the current arrangements amid growing anger about the plight of millions of graduates saddled with ballooning debts.

At the heart of the row are the estimated 5.8 million people from England and Wales who took out a plan 2 student loan between 2012 and 2023.

Many graduates are handing over money from their salary every month to repay their loan, but that can be dwarfed by the interest that is added to their debt, and as a result the sum they owe is getting bigger.

The catalyst for the row was the decision last November by the chancellor, Rachel Reeves, to freeze the salary threshold for plan 2 loan repayments for three years – seemingly in defiance of the original declaration in 2010 that the threshold would “be uprated annually in line with earnings”.

In recent days, the Conservatives and Liberal Democrats have outlined what they would do to fix the system, while the consumer champion Martin Lewis and the National Union of Students are among those spearheading the demands for action.

Lewis this week clashed on air with the Conservative leader, Kemi Badenoch, over the issue on ITV. He later apologised.

Alex Sobel, Labour member for Leeds Central and Headingley, said before the debate on Wednesday: “People on the plan 2 student loan are being outrageously scammed and burdened with unattainable debt levels and interest rates on their student loans.”

Jas Athwal, the MP for Ilford South who called the debate, said many believed plan 2 loans and the wider system were “predatory, regressive, kill graduates’ ambitions”, and the “spiralling” interest was stressful for students.

He added: “A whole generation feel bled dry by a system that just keeps taking from them.”

Luke Charters, the MP for York Outer, who is a plan 2 graduate, said: “It’s an absolute dog’s dinner of a system.” He went on to call it a “Frankenstein’s mess”.

Kate Osborne, the MP for Jarrow and Gateshead East, said: “Quite frankly, the amount of interest being charged every year is a scandal and a rip-off.”

Bell Ribeiro-Addy, the MP for Clapham and Brixton Hill, said the terms of the plan 2 loans were “more comparable to something that a loan shark would offer”. She added that freezing the threshold was “a one-sided breach of contractual terms”.

The Lib Dems’ Josh Babarinde, the MP for Eastbourne, referenced a song by the US rock band the Eagles when he said many people were trapped in “a student Hotel California”, where they could check out, graduate, but never leave.

The prime minister’s official spokesperson, asked whether the interest rate and salary threshold would be looked at, said ministers were keeping “under review the ways in which we can make life better for graduates”. The spokesperson added that “work continues” on the matter but declined to give any more details or a timeframe, saying: “We’ll update when we have one.”

At the weekend, Phillipson said the system of plan 2 loans had “problems” but suggested the government’s priority would be maintenance grants for poorer students, rather than tackling the high interest rates.

Responding to the MPs’ comments, a government spokesperson said: “We inherited the student loans system, including plan 2, which was devised by the previous government. Threshold freezes have been introduced to protect taxpayers and students now, alongside future generations of learners and workers.

“The student finance system protects lower-earning graduates, with repayments determined by incomes, and outstanding loans and interest being cancelled at the end of repayment terms.”