Select Committee on Education and Skills Minutes of Evidence


Annex 4

LEGAL ISSUES

INCOME-CONTINGENT LOANS AND THE CONSUMER CREDIT ACT

  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 financial legislation.

  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.[26] 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 loans; or

    (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.

LOANS FOR FEES AND COMPLIANCE WITH EU LEGISLATION

  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.[27] 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 is—and should continue to be—a 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.

REFERENCES

  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), 738-51.

  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/ ss—admin/content/dsp—section—29.shtml, Chapter 6).

  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 (http://www.teac.govt.nz/ fframework.htm).

  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

27   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


 
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