Government ‘mis-sold student loans’ to teenagers, MPs say
A group of MPs have accused the government of knowingly mis-selling student loans for years to unsuspecting teenagers, after using adverts comparing repayments to mobile phone contracts and failing to properly inform them of certain conditions.
The Department for Education (DfE) used a bundle of promotional materials comparing monthly student loans repayments to low-cost monthly items, including a £14 mobile contract or a £17 cinema trip, a move which the Treasury committee branded “deeply problematic”.
In the committee’s latest report, the cohort of cross-party MPs framed this move as deceptive to prospective students, as the materials ultimately failed to reflect the true compounding costs for higher earners upon graduation.
Dame Meg Hillier, chair of the Treasury Committee, said: “You’ve got 17 and 18, in some places even 16 year-olds, who were told things that are actually not the case.”
Under the Plan 2 loan framework, students face a significant long-term financial impact because it combines compounding interest rates with a lengthy 30 year wipe-out period.
The DfE’s failure to outline the impact repayments have on mortgage applications also came under scrutiny, with respondents to the committee’s consultation claiming that they were refused an application because of their loans, despite being told this would not be the case.
Promotional materials, which quote UK finance guidelines, reassured students that a loan “is very unlikely to impact materially” an individual’s ability to get a mortgage.
Dame Meg said: “I feel very strongly that we’re putting a lot of burdens on this generation..being told to go to university. Actually we need them to because we need them to get the skills and talents and jobs that help us all.
“But then they’re in a housing market that’s challenging whether you privately rent or you want to buy, and both are out of reach for so many people”.
She added this is ultimately causing aftershocks to “household income”, pensions savings and declining birth rates as people struggle to afford daily costs.
“This is a generation we need to be investing in, they’re the future of our country, and yet they are layered and layered with burdens,” Hillier added.
Government exemption
The Committee also highlighted differences over how the state handles student debt compared to commercial banks.
While private lenders face strict regulation, the government is exempt from from normal consumer protections which cover all other financial products.
Under current legislation, student loans are defined as statutory rather than contractual, meaning the terms of the debt are governed by laws passed by Parliament rather than a mutually agreed private contract.
This allows the government to alter interest rates and freeze repayment thresholds on loans that have already been taken out, as well as avoid being held to the FCA’s Consumer Duty regulations.
While the government had no legal obligation to inform students of the changes, Sir Philip Augar, a former banker who gave evidence to the committee, argued it created a “moral issue” where terms were changed in an “almost sneaky way” by each new government.
The government was also accused of failing to disclose its ability to change these terms and conditions over time.
Students were told through promotional materials that the repayment threshold would always rise in line with earnings, but at “no point was it made clear” that these terms and conditions could change, instead placing them “in the small print”, the MPs said.
“A financial services organisation has a duty of customer care; that really ought to apply to government in the context of loans sold, effectively, to young people making the first important financial decision of their life,” Augur said. “I share the outrage.”
Through dismissing the impact of a student loan on a mortgage application, the committee argued this could be seen as “a breach” of the FCA Consumer Duty, which it argued the government had a duty to uphold. Burying the true impact may have violated its requirements for transparency, they said.
Changing the framework
In response to its findings, the committee urged the government to “reverse the repayment threshold freeze” in this year’s Autumn Budget, claiming it had “a moral obligation to deliver this modest fiscal reversal not only to maintain student’s trust in government, but to honour the terms and conditions under which those loans were sold”.
It also argued that the government must “abandon” the discredited retail prices index in favour of the consumers prices index to calculate student loan interest rates and return the funding balance to a 50-50 split between the individual student and the state.
On dealing with harm to consumers, the committee argued that the DfE must ensure that all future student loan promotional materials fully comply with consumer duty, despite not having a legal obligation to do so, with future student loans to be issued as contractual agreements over the current statutory framework.
Dame Meg said the move to contractual agreements gives students “extra protections”.
“It doesn’t protect them completely because the government can put whatever it wants in that contract, but… the raising of thresholds, the changing of thresholds which has happened under governments of different colours, would be much harder to do,” she said.