The $30 million toe in the water

The UK government has defended its decision to cap student loan interest rates at 6%, saying it is a fair and necessary measure to help balance the public finances. The move has been criticized by some who argue that it will benefit well-off graduates more than those from poorer backgrounds.

The government has also rejected calls to cut the welfare bill to fund a major boost in defence spending, for fear of another rebellion.

A senior minister today defended a meagre cut to crippling student loan interest rates, saying public cash was needed to pay benefits instead of helping graduates.

Lucy Rigby cited funding for scrapping the two-child benefit limit when grilled over the government's 6% cap on the rate paid on Plan B loans by tens of thousands of young adults.

Why 4,000 unsold units became the prize

Appearing in front of MPs alongside Skills Minister Baroness Smith this afternoon, the Treasury Chief Secretary defended the cap brought in by Rachel Reeves in April.

The Chancellor acted amid a national clamour for action, backed by Tory leader Kemi Badenoch, at the eye-watering repayments demanded of some graduates, many with no chance of paying off the loan entirely during their working life.

Mrs Rigby told the Treasury Committee this afternoon: We do have to bear in mind fairness to taxpayers as a whole … the majority of young poeple don't go to university.

She added: There is a host of things which we have been able to do (to help students), but politics is about choices and the Chancellor has chosen to prioritise a number of things including lifting the two-child benefit cap for example, funding free breakfast clubs, SEND reform.

An echo of Sydney's 2024 institutional buy-up

The decision to lift the two child limit on paying benefits to parents was made earlier this year after a major rebellion by Labour backbenchers.

Mrs Rigby's remarks also come days after it was revealed Work and Pensions Secretary Pat McFadden complained that party MPs were bombarding him with demands for new taxes to fund more handouts.

Treasury Chief Secretary Lucy Rigby was grilled over the government's move in April to cap the interest rate paid on some loans at 6% from September

Who is the unnamed buyer?

The government has also rejected calls to cut the welfare bill to fund a major boost in defence spending, for fear of another rebellion.

Mrs Badenoch today demanded benefits curbs to help fund the military, condemning signals from the Chancellor that taxes will need to go up again instead.

The Treasury has been playing hardball over how much money can be allocated to defence, and where it will come from.

Tehran's two-track response

As well as a multi-billion pound shortfall in existting budgets, there are disagreements over how and when targets for increasing spending can be reached.

The Government's room for manoeuvre is limited after a revolt last year torpedoed efforts to curb spiralling sickness benefits.

Plan 2 student loans are those taken out for undergraduate courses and Postgraduate Certificates of Education since September 1 2012 in Wales, and between September 1 2012 and July 31 2023 in England.

Interest on these loans was paid at the rate of Retail Price Index inflation (RPI) from the March preceding the beginning of the academic year in September, plus up to 3 per cent extra depending on income.

Before the cap the maximum was 6.2 per cent,but it would have gone up to 7.1 per cent in September due to a spike in inflation linked to the war between the US and Iran.

Between 2024 and 2025, the percentage of the total higher educaion loan balance attributed to borrowers on Plan 2 schemes was nearly 80 per cent.

When the cap was unveiled the Institute for Fiscal Studies think tank said the reforms are likely to reduce the burden for higher-earning graduates but will do nothing for those on lower incomes who will still see their interest rate set at RPI.

The Tories have pledged to limit interest rates in the Plan 2 system, which was introduced under the Conservative-led coalition government of the 2010s, to RPI only.

Baroness Smith insisted the 6 per cent cap was fair when grilled by former Tory Treasury minister Harriet Baldwin .

It would have been a very big impact on the public finances if for example we reduced interest rates in the way in which some people have suggested that we should do for Plan 2 loans, she said.

That would cost a considerable amount of money.

So those are the decisions we have had to weigh up in terms of the fairness of the interest rate