102. Though income-contingent student loans
are not made under the Consumer Credit Act (CCA), it is desirable
that they stay as close as possible to the Act and to other relevant
103. The problem is as follows. Under the
CCA, loan agreements have to specify interest charges across the
life of the contract. That is possible only if the repayment flow
is known. This is not a problem for a conventional (mortgage-type)
loan, but is not possible with income-contingent loans, where
repayments depend on a person's (unknown) future income stream
and hence have an unknown duration. The issue was sidestepped
in 1997-98 by arguing that the current student loan, which is
indexed to the retail price index, is below the low interest threshold
for the CCA.
Since that threshold is low, an unsubsidised loan would almost
certainly exceed it, if not now, then at some time in the future.
104. There are two potential avenues to
resolving the problem:
(a) revise the CCA to accommodate income-contingent
(b) ensure that the legislation bringing
in new student support arrangements explicitly excludes those
arrangements from the CCA via Statutory Instrument.
Approach (b) presents no obvious problems: a
loan which charges the government's cost of borrowing is within
the spirit of the CCA; the process in (b) is simpler and quicker
than (a); and it leaves it open subsequently to amend the CCA
if the government so wished.
105. At present, UK students are eligible
for a loan which covers (part of) their maintenance, but not their
tuition fees. If loans covered fees, it would be illegal to deny
loans to students from other EU countries studying in the UK.
A court case is currently testing whether it is legal to deny
such students access to maintenance loans. In considering the
coverage of loans, the following points are relevant.
106. Loans to cover fees are highly desirable
because they make higher education free at the point of use. Thus
the issue of EU-compliance should be addressed in the medium term;
and it might have to be addressed in the short term even for maintenance
loans, depending on the outcome of court case mentioned above.
The problem should not be exaggerated. The loan contract that
students currently sign entitles them to income-contingent repayments
while within the UK tax net, but requires them to make mortgage
(or similar) repayments if they work abroad. This process is already
embedded in the procedures of the Student Loans Company and works
well. In the short run it could be extended to EU students.
107. A better starting point is to note
that foreign students are a good thing, not a bad thing. Higher
education isand should continue to bea major UK
export industry whose benefits are both direct (income from overseas
students) and indirect (future UK exports). A properly designed
loan scheme is self-funding apart from non-repayments from the
lifetime poor, which introduce a social policy element into the
scheme. Extending the scheme to EU students is thus feasible on
the basis that each government agrees to cover the social policy
element of loans for its own citizens.
Barr, Nicholas (1997), "Student Loans in
New Zealand", in Third Report: The Dearing Report: Some
Funding Issues, Volume II, Minutes of Evidence and Appendices,
House of Commons Education and Employment Committee, Session 1997-98,
HC241-II, (TSO, 1997), pp 119-21.
Barr, Nicholas (2001), The Welfare State
as Piggy Bank: Information, Risk, Uncertainty, and the Role of
the State, Oxford University Press.
Barr, Nicholas and Crawford, Iain (1997), "The
Dearing Report, the Government's Response and a View Ahead",
in Third Report: The Dearing Report: Some Funding Issues, Volume
II, Minutes of Evidence and Appendices, House of Commons Education
and Employment Committee, Session 1997-98, HC241-II (TSO), 88-103.
Barr, Nicholas and Falkingham, Jane (1993),
Paying for Learning, Welfare State Programme, Discussion
Paper WSP/94, London: London School of Economics.
Barr, Nicholas and Falkingham, Jane (1996),
Repayment Rates for Student Loans: Some Sensitivity Tests,
Welfare State Programme, Discussion Paper WSP/127, London:
London School of Economics.
Barr, Nicholas, and Low, William (1988), Student
Grants and Student Poverty, Welfare State Programme, Discussion
Paper WSP/28, London: London School of Economics.
Callender, Claire, and Kemp, Martin (2000),
"Changing Student Finances: Income, Expenditure and Take-up
of Student Loans among Full- and Part-time Higher Education Students
in 1998-9", London: Department of Education and Employment
Research Report RR213.
Chapman, Bruce (1997), "Conceptual Issues
and the Australian Experience with Income Contingent Charges for
Higher Education", Economic Journal, 107/442 (May),
Committee of Vice-Chancellors and Principals
(1996), Our Universities, Our Future, Special Report 4: The
Case for a New Higher Education Funding System, London: Committee
of Vice-Chancellors and Principals.
Council for Industry and Higher Education (2001),
The Funding of UK Higher Education: The CIHE Submission to the
Comprehensive Spending Review, London: Council for Industry
and Higher Education.
Department for Education and Skills (2001),
Higher Education Student Support in England and Wales 2001-02:
Chapter 6: Assessing Financial Entitlement (http://www.dfes.gov.uk/studentsupport/
National Audit Office (2002), Widening Participation
in Higher Education in England, Report by the Comptroller
and Auditor General, HC 485, Session 2001-2002, London: TSO.
National Committee of Inquiry into Higher Education
(the Dearing Committee) (1997), Higher Education in the Learning
Society: Main Report, London: HMSO.
New Zealand Tertiary Education Advisory Committee
(2001), Shaping the Funding Framework: Fourth Report of the
Tertiary Education Advisory Committee: Summary Report, Tertiary
Education Advisory Committee, Wellington, New Zealand, November
Piatt, Wendy, and Robinson, Peter (2001), Opportunity
for whom? Options for funding and structure of post-16 education,
London: Institute for Public Policy Research.
26 The England, Wales and Northern Ireland Teaching
and Higher Education Act 1998 (THEA 1998), s22(4) and s22(9) provide
that Secretary of State may only charge compound interest rates
required to maintain the value in real terms of the outstanding
amounts of the loan, which shall at no time exceed the "specified
rate for low interest loans". This "specified rate for
low interest" is defined in s22(9) as the rate specified
for exemption purposes under s16(5)(b) of the Consumer Credit
Act 1974 (CCA 1974). The Scotland Teaching and Higher Education
Act 1998, s29 inserts amendments to the Education (Scotland) Act
1980, (ESA 1980). The ESA 1980 s.73B(6) includes the same provision
as s.22(9) of the THEA 1998, and therefore defines the low interest
rate as a rate that will ensure exemption under the CCA 1974. Back
The post-Cubie arrangements in Scotland, by ensuring that students
face no upfront charges, in effect extends loans to cover fees,
thus raising serious problems of compliance with EU law. Back