The Government has today been accused of mis-seling student loans in a damning official report.

The Treasury Select Committee has probed whether the current student loans system is 'broken and unfair', and has decided it wholly agrees that it is.

In a report released today, the committee orders the Government to reverse its freezing of the repayment threshold for some student loans.

This is Money has scrutinized the report to answer all of your burning questions about what it could mean for your money.

How do student loans work?

It's hard for current graduates to imagine, but until the late 1990s you didn’t have to pay to go to university. On the contrary, you’d get a grant rather than be charged fees.

Once the fees were introduced, however, anyone who couldn’t afford to pay their fees up front had little choice but to take out a student loan.

The terms of these loans have been tweaked and toughened up by successive governments – and of course alongside that, fees have risen.

There are different loan systems based on when someone went to university.

Plan 1 graduates are those who 1 who started a course before September 1, 2012

Graduates who started university between September 2012 and July 2023 – and anyone since then in Wales – are on the Plan 2 repayment scheme. It’s these who have got the rawest deal.

Plan 4 is those who applied to the Student Awards Agency Scotland and Plan 5 is English students starting a course on or after August 1, 2023.

All of these undergraduate borrowers must pay back 9 per cent of any earnings over the threshold, which is different for each plan. For Plan 1 it is £26,900; £29,385 for Plan 2; £33,795 for Plan 4 and £ £25,000 for Plan 4.

The only plan that pays a different proportion of their income is those with a postgraduate loan – they must pay 6 per cent of earnings over £21,000.

But the plans also accrue interest at different rates too. Those who studied before and after Plan 2 are charged 3.2 per cent interest, which is the Retail Price Index (RPI) figure for inflation from March last year. But Plan 2 graduates accrue interest based on their income.

Those earning less than £29,385 are charged 3.2 per cent. Those earning between £29,385 and £52,884 will accrue interest at a rate of 3.2 per cent plus as much as 3 per cent depending on their earnings.

Anyone earning £52,885 or more will see their loans balloon at an interest rate of 6.2 per cent this year. This will be capped at 6 per cent from the 2026-27 academic year.

What is the controversy around the student loan system?

The student loan system was thrust into the spotlight in January following a public spat between finance presenter Martin Lewis and Chancellor Rachel Reeves.

Ms Reeves had frozen the repayment threshold at which English graduates on the Plan 2 scheme must start making repayments, which prompted fierce uproar from graduates.

In the 2025-26 tax year, Plan 2 graduates were forced to repay 9 per cent of their earnings over the £28,470 threshold However, Ms Reeves announced that the allowance would increase to 29,385 in April 2026, but then freeze at that level for three years from 2027.

It means as lower-earning graduates begin to steadily grow their salaries through hard work, more of it will be taken away.

Some graduates who were earning under the threshold would never need to pay it back had their wage and the threshold both increased in line with inflation.

But the freeze means graduates will be pulled into paying the student ‘tax’ for the first time - earlier than they otherwise would have done, in a phenomenon known as fiscal drag.

And others already paying back their loan will 9 per cent of a bigger chunk of their pay check taken away.

It sparked fury among graduates, but it was also the catalyst for a much wider debate on the student loans system, specifically these Plan 2 loans as they are the only ones where interest accrues faster than RPI.

Graduates also claimed they were told the amount they would be paying back was similar to a mobile phone contract when they signed the contract.

Many graduates began sharing outstanding balances totalling more than £100,000 – more than the original loan they had taken out. One unlucky student had £314,000 accruing interest.

And for swathes of graduates, their loan was growing faster than they were repaying it.

Four-fifths of graduates have seen their student loan balance grow faster than they are repaying it, new data from the Student Loans Company, obtained by Compare the Market, reveals.

More than seven million student loan balances had increased as of May while around 1.5 million had decreased.

Just 17.4 per cent of graduates saw their loan amount decrease.

What does the report say?

The unfair student loans system is ‘unfair and broken’, according to the official probe.

It condemned the use of RPI as a metric to calculate the interest charged on a balance – and instead argued that CPI – Consumer Price Index, which is often lower – should be used instead.

The Government has set a 6 per cent cap on the interest payable on Plan 2 and 3 loans, but this will only protect those paying off their loan in full, the reporter says.

Plus, it said that past and present governments have frozen the threshold despite repeated promises that it would not do so.

Did the Government mis-sell student loans?

In the most damning verdict from the report, Government has been found to have mis-sold student loans on three counts.

The first is that the DfE produced promotion materials that compared the cost of monthly loan repayments to that of a mobile phone contract or cinema tickets. While this may be the case for some workers, many high earners will need to shell out far more than this in repayments.

The department also produced videos and slides that did not disclose that the government ca change the terms and conditions of the loans after the fact.

Plus, the SLC also did not make it sufficiently clear in the application process that there could be retrospective rule changes.

Despite this damning verdict from a cross-party selection of MPs, the Government cannot be held legally liable for mis-selling in an outrageous loophole.

This is because the Government has expected its student loan policies from consumer protection laws. However, the reports adds: ‘No government should ever have taken advantage of this exemption by pursuing lending practices that cause consumer detriment.

‘Students have a right to expect that government acts as an exemplary lender. Successive governments have undermined that expectation.’

What should the Government do?

The Government must reverse the decision to freeze the repayment threshold made at last year’s Budget, the report orders.

Dame Meg Hillier who chairs the committee, says: ‘It is not common for a Treasury Select Committee, made up of MPs from the three largest parties, to agree that a specific Budget measure announced by a Chancellor must be reversed.

Our report is a signal to the Treasury and the Department for Education that this can no longer be ignored. Patience has run out.

‘Ministers openly accept that the system is broken and unfair but have said that it is not a priority to fix it. While I understand that there are many competing pressures on a government, reversing last year's threshold freeze is a modest change that would not eat up vast resources.

‘Importantly, I believe it would go a long way to repairing the damage done to the trust between graduates and those responsible for overseeing the student loans system.’

Plus, the DfE must also ensure all promotional materials are complaint with financial watchdog rules. It should work with the SLC to add a feature to annual balance statements that indicate how much of the loan is likely to be written off.

What does it mean for you?

Unfortunately, the government is not bound to make the changes recommended in the report. Only time will tell if officials – most likely Andy Burnham’s incoming government - will listen to the changes demanded by the committee.

Reports can be influential, however. If the Government does decide to make the changes suggested then an unfreezing of the threshold means graduates will get to keep more of the pay-packet every month.

Plus, it will mean some graduates will be pulled out of the student ‘tax’ net completely.

A spokesman for the Student Loans Company says: 'The Treasury Committee’s inquiry makes an important contribution to the debate on student finance.

'The Student Loans Company administers student finance on behalf of the UK Government and the devolved administrations of Wales, Scotland and Northern Ireland, supporting students and borrowers throughout their student finance journey, in accordance with government policy.

'The report focuses on Plan 2 and Plan 5 repayment plans, and we recognise the importance of ensuring that students and borrowers across all repayment plans have access to clear, accurate and timely information about student finance.

'We take this responsibility seriously and we will continue to work closely with the Department for Education, including on any wider actions arising from the report.'

The Department for Education has been contacted for comment.