Ministers are examining ways to ease the burden of student loans after weeks of pressure over a policy pulling more people into repayments, the Guardian understands.
The Treasury and the Department for Education are reviewing different options to offer relief to those with plan 2 student loans, which often leave graduates in England and Wales paying tens of thousands more than the original loan amount.
The Conservative leader, Kemi Badenoch, has said her party would change the rate of inflation that applies to student loan repayments.
Labour MPs have lobbied the government to instead think again about a freeze on the student loan repayment threshold – which will be kept at £29,385 for three years until 2030 and is likely to cause graduate repayments to go up by up to £300 a year.
Sources said reversing the freeze had not been ruled out and could be credited to an improving economy.
Given the rise in the minimum wage, it is likely almost all but the very lowest paid graduates will start paying back their loans immediately. The rethink comes after a backlash from graduates over the “mis-selling” of the loans, which many believed they would not pay back until they were earning significantly higher salaries.
Questions have also been raised over the rate of inflation being used to increase the loans, which uses the RPI measure, which the government itself considers to overstate the rate of inflation.
Graduates can be charged RPI inflation plus 3% on a loan, depending on their earnings. The repayments mean graduates are paying an effective marginal tax rate of 51% on earnings over £50,270.
Badenoch attacked Keir Starmer over the student loans system during prime minister’s questions on Wednesday, even though it was introduced by the Conservatives. She said the system was “now at breaking point for graduates, I believe that student loans have become a debt trap”.
Martin Lewis and Kemi Badenoch discussing student loans policy on Good Morning Britain this week. Photograph: YouTube/Good Morning Britain
Starmer said the Conservatives “scammed the country on this, and that applies to everything they did in government”.
“We inherited their broken student loans system,” he said. “We’ve already introduced maintenance grants to improve the situation, which they scrapped, and we will look at ways to make it fairer, and we will do other things within the economy to help students.”
Starmer said the Conservatives had frozen thresholds for a decade during which the rate of inflation had had a significant effect on students.
Speaking after PMQs, Starmer’s spokesperson said the government wanted to make the system fairer, though it is understood any new measures were unlikely to come at next week’s spring statement. “You can take it as read that, as the prime minister has said, we’re looking at ways to make it fairer and that includes the Department for Education,” the spokesperson said.
Asked if that included the threshold freeze, they said: “What both the prime minister and the education secretary have said is that they will keep under review the ways in which we can make life better for graduates.”
Badenoch was meeting the consumer rights expert Martin Lewis on Wednesday to discuss his campaign on student loans.
Lewis told Good Morning Britain that the changes to the loan terms would not have been allowed for a commercial loan. “It’s a breach of contract, it is not moral,” he said, as he directed his comments at Rachel Reeves: “Chancellor, you need to reverse that decision and give students what they were promised. The threshold needs to go up with average earnings.”
A number of Labour MPs spoke at a Westminster Hall debate describing their own experiences of student debt and calling for changes. Luke Charters, who said he had a plan 2 loan, described the system as a “dogs’ dinner” and called for significant reform.
Another MP, Chris Hinchliff, said the government needed to deal with the repayment threshold freeze before the next election.
