Select Committee on Education and Skills Minutes of Evidence


Examination of Witnesses (Questions 140 - 159)

WEDNESDAY 24 APRIL 2002

DR NICHOLAS BARR AND MR IAIN CRAWFORD

Chairman

  140. Good morning. Can I thank Dr Barr and Mr Crawford for being patient with us. I have explained that the Committee has been under some pressure to complete our Inquiry into Individual Learning Accounts, which, we are happy to say, by coming in very early this morning and going a little late, we have now completed, and can I congratulate the Committee, as well as apologise. Can I say, first of all, that I would like to make a declaration of interest, that Nick Barr and I and Iain Crawford, we all have known each other for many years, in fact, Nick and I were at the London School of Economics together, and I am a governor of the London School of Economics; so I think I have made that quite clear. We are, as they say, old chums. I usually say to my old friends, that does not mean to say that I will not push you harder than anybody else who comes before this Committee; but welcome. As you know, this Committee is looking again, as you know, we looked at access and retention in higher education a year ago, and we have taken that report down and are looking at it again, in the light of the Government's decision to have a cross-departmental inquiry into student finance. We have taken some evidence on this, and we are now again trying to conclude the updating of our report. Now, Professor Barr, we have been very interested in hearing and reading your contributions to this very important debate on student finance, and what we are trying to discover, as a Committee, is precisely what is the best system that would encourage students across the piece to come into higher education and stay in higher education. And can I start by saying, there seem to be two academics that most of this Committee have heard develop their arguments in this area; one is yourself and the other is Professor Claire Callender, from the South Bank University, who has done a deal of work on this. What are the essential differences between the sorts of conclusions that yourself and Claire Callender are coming up with?

  (Dr Barr) I think Professor Callender is looking specifically at impediments to access, and looking at what the data show about that, which is a fundamentally important part of the picture. The work that Iain Crawford and I have been doing has been looking at the funding picture more broadly, on the grounds that if the objectives are access and quality, both need resources, but resources are scarce, therefore one of the key things you need to make sure you do is avoid giving money where it is not needed, in order that you can use it for where it is needed. So the part of my evidence that directly links to the work of Claire Callender is the last section of my paper, where I set out a strategy with three legs. One, flexible fees. Secondly, a good loan scheme, meaning adequate and universal, and I am happy to come back to that. Third, active measures to promote access, not just in terms of money, though partly in terms of money, but also in terms of extra personal and intellectual support for students when they reach university, but recognising that impediments to access happen much earlier than 18, or 17, they go back into schooldays. Therefore if you are serious about access you need to do an awful lot of raising of aspirations and consciousness-raising in schools. But the core of the argument is, all those things need resources, the resources should be targeted at the group that Professor Callender has been studying, and not spread indiscriminately across mainly middle-class students, and via interest subsidies. Which is the main reason I went into such length about the horrors of the interest subsidy on student loans, it is not that I have any problem about being kind to students, I am very keen on being kind to students, but interest subsidies are actively hostile both to access and to quality.

  141. Given there is a difference between yourself and Professor Callender, now let me give you a chance to say, in a nutshell, because there are an awful lot of people who will be following the proceedings of the Committee who have not read your research, in a nutshell, what is a message that you would like to put over to the broader audience?
  (Dr Barr) Three points. First of all, it is impossible to exaggerate the importance of income-contingent repayments, that the Government brought in, in 1998; enormously important. An implication is, student loans, repaid by income-contingent repayments, is logically equivalent to grants paid for out of taxation, with only two differences. First of all, the "tax" is paid only by people who have been to university, not by poorer people, not by people who have not been to university. Secondly, unlike a tax, it does not go on for ever, but gets switched off. So, key point one, loans with income-contingent repayments are equivalent to a grant paid for out of a targeted, income-related graduate contribution. Key point two, the contribution is small. I did some sums, after the Budget; the 1 per cent addition to National Insurance contributions that the Chancellor brought in, in the Budget, comes pretty close to paying off a full student loan. So the contribution that is required to repay is very small. And the third point, and the one that I really want to emphasise, is the single, critical, policy change that we are arguing for is that the interest rate that students pay on their loans should be raised from the rate of inflation, as it is currently, to the Government's cost of borrowing, not the credit card rate, the bank overdraft rate, but to the Government's cost of borrowing. And I would be grateful, at some stage, for a chance to explain just how horrible interest subsidies are in the effects that they have on both access and quality.

  142. Lord Dearing thinks that the Government got it all wrong, in terms of their response to his original inquiry in 1997, and, in a sense, the policy they adopted, where it ended up in giving a massive subsidy to the professionals, the middle-classes, penalising the poorer students; would you agree with that analysis by Lord Dearing?
  (Dr Barr) Absolutely. Interest subsidies, first of all, they are fiscally expensive, they are horrendously expensive. Secondly, because they are expensive, the Treasury rations loans, so they are too small, so students are poor, and that itself is an impediment to access. Third, because student support is politically salient, money for students crowds out money for institutions, so interest subsidies are directly hostile to quality. And fourth, and critically, you have to ask, who benefits from interest subsidies; interest subsidies benefit one group, and one group only, successful professionals in mid career. Just to explain that. Interest subsidies do not help students, because students do not make loan repayments, only graduates make loan repayments. Secondly, they do not help low-earning graduates, because loans are forgiven after 25 years, so anyone with low earnings will not repay in full. They do not help high-earning graduates early in their careers, because, with income-contingent repayments, the monthly repayment of a graduate depends on his, or her, earnings, and on nothing else. So the interest rate only affects the duration of repayments. So the only people who benefit are high-earning graduates in mid career, whose loan repayments stop after, let us say, ten years rather than after 12 years, the 12 years it would take if they had to pay an unsubsidised rate. So interest subsidies are targeted with exquisite precision on the very last group who need help; it gives it to the people who need it least, at the time they need it least. So the NUS position, defending interest subsidies, is arguing for continued subsidies for those who need it least, at the time they need it least, and the hell with today's inner-city sixth-formers. So—very expensive, goes to the wrong people, would do much better being used for the sorts of policies that Professor Callender has been advocating.
  (Mr Crawford) I think it is worth keeping in mind the scale of this as well. My understanding of the present circumstances is that, for every pound which is lent to a student, 35p is written off, because that will be the cost of the interest subsidy. So it is not a trivial amount of resource, and it is certainly an amount of resource which we both profoundly believe could be better used somewhere else.

Mr Shaw

  143. We know the Government are conducting the review at the moment with the DfES, the Treasury, the Inland Revenue; have you made a contribution to that review, have you been asked to make a contribution?
  (Dr Barr) We have always taken the view that we will talk to anybody who is prepared to talk to us. We have also taken the view that, as academics with academic freedom, if we have views we will feed them into the system; so we have made our views known by sending in documents.

  144. The Treasury have not actively pursued you?
  (Mr Crawford) We have had, informally, discussions with officials and politicians, over the last 12 months.

  145. As a direct result of the announcement of the review?
  (Mr Crawford) I think, over the years, we have probably talked to Ministers and Shadow Ministers, whoever was in Government, and often to their officials, it has been an ongoing dialogue probably for about 12 or 14 years now, as the Chairman is aware. Yes, we have spoken informally to some of the advisers in the Treasury.

  146. Interest rates are low, at the moment, and you say that, but interest rates go up and down, sometimes they go up horrendously, to 15 per cent; how would that impact upon your proposal?
  (Dr Barr) If the interest rate goes up, the student's monthly repayment remains X per cent of his, or her, earnings and does not change at all; all that changes is the duration of the loan. So, just to give an idea of some of the numbers, I have been calculating some of the numbers, if you take the graduate on average earnings plus a small graduate premium, over a 40-year career, he, or she, will pay in income tax and National Insurance contributions about £825,000; so we are talking about huge—

  147. Was that before or after the Budget?
  (Dr Barr) That was before. So we, all of us, will pay over the rest of our careers hundreds of thousands of pounds in tax; the loan repayment will go on for a bit longer, or a slightly shorter time, depending on the evolution of interest rates, but it does not dig into people's monthly living standards, it is merely a question of the duration of the loan. So if interest rates go up, as they might well do over the longer term, at least for some periods, then that would tend to extend the duration of loans a bit; but, remember, all loans are forgiven after 25 years, so it is not going to hit anybody very hard.

  148. There is one other question; a slight departure from it. If you were the Chancellor and you had a small pot of money for student finance, how high up on the list of priorities would be expanding the EMAs to post-16 students on your list?
  (Dr Barr) I think that, if the objectives are access and quality then you have a lot of students from middle-class backgrounds who can pay their own way through university, via a well-designed loan scheme, which will have very little fiscal cost; so they can pay, to a significant extent, for their own living expenses and a contribution towards tuition fees without much of a burden to the taxpayer. That then frees up taxpayer money to do two things: one to improve the quality both of tertiary education and school education, and I am sure we all support that; secondly, it would free up money to promote access both through scholarships at the university level for students from poor backgrounds but also at the school level, and EMAs would be very much part of the picture. But one point I would like to make, if you look at the causes of exclusion, there are two causes, shortage of money is one, shortage of information is another; so any strategy for access needs to target financial resources where they are needed, but you need a huge effort on information, consciousness-raising in schools, etc. So EMAs are important, and I would support them, but alongside that you need to do a lot more to inform schoolchildren from poorer backgrounds.

  Ms Munn: I am very interested in this, and it is all very fascinating, but if we come back to one of the problems about whether people go, this issue about perception and what people think is going to happen, and I can entirely understand when you suddenly start saying, "Let's have a proper interest rate," whatever that is, rather than a subsidised one, and students say "Oh, my goodness, that's greater cost;" and that is part of the issue. So I would like you just to try to address how we deal with perception, you might say that is not your business, but, also, do you think partly this is about the culture that is around in this country, because the culture actually of having student loans is relatively recent? And, if you look to the Continent, I know, when I was a student, 20-plus years ago, and going to France and Germany, people had loans then, and that was understood, and it did not seem to stop students there actually going on for years, studying. And if you look at the culture in the United States, which I am less familiar with, but my main familiarity comes from programmes like ER, where the doctors are all running round, saying, "I've got these X loans," but, again, it is part of the culture and it seems to be a pay-off for it. I do not know how good an indication of culture it is, it is probably more about my culture of watching.

  Chairman: This is becoming a very long question.

  Ms Munn: Can you look at those two issues, perception and culture?

Chairman

  149. Ignore ER, please?
  (Dr Barr) Let me start and then I will hand over to Iain. The Government brought in income-contingent loans in 1998, which is a huge, enormous tick, it was incredibly important, but the quality of the dissemination and explanation of what the Government have done beggars belief, in its awfulness; people simply do not understand—

Mr Pollard

  150. Can you be a little clearer?
  (Dr Barr) When I did a new edition of my book, I asked for the same crackerjack OUP copy editor I had had the previous time round; she has children of university-going age, both the old loan scheme and the new loan scheme. When she did the new edition, she was gobsmacked to learn that her youngest child would be receiving income-contingent loans; this is one of the best and the brightest of OUP, who simply did not know. So, key point one, one has to explain, and the way to explain it is to say, what we are urging the Government to do is to raise student loans so that they are enough to cover all living costs and all tuition fees, so higher education is free at the point of use; from the students' point of view, it looks like bringing back a grant. And then you say, "We're bringing back universal grants, just like you asked us, you're going to pay for it, out of taxation, but this tax will not be imposed on everybody, it will be imposed only on students who go to university and, unlike a tax, it won't go on for ever, eventually it will be switched off." So, with absolute truth, no fudging, no skull-duggery, you can say, universal grants, paid for out of a graduate contribution, and then people focus on the extra few pence in the pound they will be paying on top of their income tax for a period of years, rather than a headline figure of debt, which scares people quite unnecessarily. As I say, if you say to a graduate, "You're going to pay over £800,000 in taxation over a 40-year period," they do not lose any sleep over that, taxation is something you do as you go along.
  (Mr Crawford) Though there has been a new headline figure, because the NatWest annual survey of student finance and student debt came out this week. I was at a seminar with them yesterday, and with some graduates, and the headline figure is now £10,000. I agree entirely with Nick's criticism of the Government, but, to be fair, I think the problem was that the Dearing Report came out, the then Secretary of State responded to it, but at that stage clearly he had not got the agreement via the Treasury to introduce income-contingent loans, income-contingent loans were introduced about four or five months later, when the heat of the debate had passed, and it did not ever get across, in the way that it would have been useful if it had. So the focus is on the net debt. Now, the previous loans system was a mortgage style loans system, once you passed a threshold you paid X pounds per month. The seminar was very interesting yesterday; £10,000 student debt, is this good or bad, well, it depends entirely on what sort of debt it is. Now, if it is bank overdraft debt, or credit card debt, it could be anywhere between 5 and 20 per cent. So let us assume a student debt is £10,000, at the moment it is probably going to be about £5,000 at zero real interest from the Student Loans Company, and another £5,000 at, say, 10 per cent. Now, if you take away the expensive subsidy from a student loan, by going to the Government rate of borrowing, where we are talking of, what, 2½ per cent, you will then be able to lend students as much as they need, actually their aggregate interest rate charge probably will drop. But what is interesting, if you talk to real students and graduates, is that they also do what everybody else does, which is buy electronic goods on credit cards, etc.; students have debts because they believe they are going to earn enough to pay back the cost of a small motorcar, or whatever piece of hi-fi equipment they buy, just like anyone else. And the problem with this student debt headline figure is, I think you have got to disaggregate what is the state subsidy debt, as opposed to what is expensive credit card debt, and what debt is incurred that they need to incur in order to be students, as opposed to what debt are they incurring to be consumers like everyone else of their generation at the time. So it all gets conflated into this large headline figure, which definitely works against us all, in trying to get across to people that, particularly people who have got little family history of higher education, whose parents might well be quite heavily debt-averse, I think that politicians and commentators such as ourselves have got to work really very hard to get across the new kind of student loan is not one that is going to end up with court orders because you missed a month's payment, and all of the horrors that parents typically worry about when their offspring are getting into debt. And I think there really does have to be some efforts in getting over this headline debt figure as the great horror of the reforms, because it is not like that when you look at it in detail.

Mr Simmonds

  151. How does the Government's target of 50 per cent of the population going on to higher education complicate the calculations that you have made in your proposals; does it make a difference, and does it exacerbate the problem that exists?
  (Dr Barr) The more students you have the more important it is to have a system that allows middle-class students, at least, so far as their living costs are concerned, to stand on their own feet, in fiscal terms. So a 50 per cent participation rate—sorry, I will put this more simply. If you have got an e"lite system, if you have got only three per cent of people going to higher education, the taxpayer can cop the lot with no problem; and the more you want to have a mass system, which is a trend that we both want and we welcome, the more important it is to have a system where middle-class students can, at least for their living costs, pay their own way through a decent loan scheme, freeing up taxpayer resources for quality and to promote access. So, in a way, the 50 per cent target accentuates the need for the sorts of policies we are advocating.

  152. The solution that you seem to have arrived at is that to get a higher interest rate the debt levels will be greater, although they will be paid off over a longer period of time. Does that find a solution to the problem that currently exists, that many potential students, from less well-off backgrounds, do not go on to higher education because they are afraid of the levels of debt that they are actually going to get into; and I do not quite understand how your solution would get round that problem?
  (Dr Barr) If you get rid of the interest subsidy, you can make loans larger, so that students have enough to live off, without huge fiscal costs, and that deals with middle-class students; you can then use the taxpayer resources you save for precisely the students you are talking about, grants, scholarships, things like that. So ours is a plea for targeting. Interest subsidies are like taking a knob of butter and spreading it very thinly over an enormous slice of bread, and we are saying that is a crazy way to spend that huge sum of money, you should be targeting it on those who need it most.
  (Mr Crawford) Let me come back to the sums here; 35p in the pound interest subsidy, if you are lending next year probably in the order of £2 billion.
  (Dr Barr) Two and a half billion, next year.
  (Mr Crawford) That is giving you upwards of three-quarters of a billion, which you can then use. I think we are both clearly of the same mind. If you want kids to get into university, first of all, they have got to have A levels, and that requires levels of parental support whilst they are in the school system. If you want actually to give money away that way then look at giving it away in a more imaginative fashion, to keeping people on from underprivileged backgrounds, to keeping people on at school from 16-18, so that actually they can gain the qualifications to get into the higher education system. I would argue that probably we are losing more people at that part of it than we are deterring from going on.

  Chairman: I think the Committee would agree with that.

Paul Holmes

  153. Partly carrying on from what you were saying, one of the great problems is trying to get the children from working-class, socially-disadvantaged families into higher education, and the percentage going to higher education has not really changed in the last 30 years, from that sort of view. It seems to me that your suggestion, that the way to encourage them in is to say to them, "You can have a bigger debt, you're going to pay it off at a higher interest rate and we're going to make you pay higher tuition fees as well, especially for the more prestigious universities you go to," that is hardly, to me, it would seem, going to create with them an impression that, "Oh, yes," higher education is a thing for them. Now your answer to that partly is scholarships and grants, but you do not put a detail in the summary we have got here; so what sort of level of students are you talking about, what per cent, 10, 20, 30, 40 per cent, are going to get these free scholarships, free grants, where they are not repaying anything at all?
  (Dr Barr) What we were trying to do here was set out a sensible strategy, not go into the sort of detail that would need the numbers, that this Committee has access to, that the Treasury has access to. But, I think, to come back to the point about the money; next year, the Student Loans Company is going to lend £2½ billion, 35 per cent of that is going to go down the gurgler in interest subsidies, that is £800 million. The question is, if you have got £800 million to spend, do you want to use it for the exclusive benefit of future successful professionals in mid career, which is what interest subsidies do, or do you want to use it to promote access and quality; and I am sure that we all agree, it is crazy to spend £800 million benefiting successful professionals in 15 years' time, that money does not help a single student or a single schoolchild. And the answer is, you use that money to help schoolchildren, to help students from poor backgrounds at university. It may well be that if there is a rational loan scheme it makes more sense for the Treasury to come up with more taxpayer money to promote access than it has up to now. With a system like this, if I were Chancellor, I would be blowed if I would want to spend more money on higher education finance, when so much of it goes to the wrong people; get the targeting right and there is a much stronger case for taxpayer support for those who really need it, and that would be a case that I would very strongly support.

  154. The devil is in the detail though. If you are saying that we overcome the problem with the poor students by giving them some grants and scholarships, but we do not know quite what that would be, if it ends up being 10 per cent of students, that is hopeless. In Wales, they have introduced, it is 40 per cent of students who will get free grants, effectively; and there have got to be some figures on that and on what sort of percentage you are going to hit, if it is going to be a realistic proposal?
  (Dr Barr) The present system takes £800 million and blows it on mid career, successful professionals. Any targeting must do better than that. Will it be as much as you or I would want to do, possibly not, but at least it is better than the present system; and the better it becomes the more it becomes rational to make a plea to the Chancellor for more taxpayer resources.

  155. Finally, you look at the students who fall more in the grey area, or students who are coming from more affluent backgrounds, but we are wanting lots of those students, we need, what is it, 60 per cent more maths graduates to go on to be maths teachers, because of the massive shortage of maths teachers in schools. They are going to look at the salaries they get as a teacher in the public sector, or as a social worker, or as a nurse, and they are going to look at the size of the repayments and the fees, and everything, that you are saying you are going to increase, and they are going to say, "We're not going to work as teachers and social workers and nurses." How do you overcome that problem?
  (Mr Crawford) We are not advocating increasing the size of anybody's repayments, merely a slight extension of the duration.

  156. I think that is a play on words, really; they are going to repay a lot more, however you slice it?
  (Mr Crawford) Not at all. The Government did a very, very important thing, when it moved away from the old mortgage style repayments to income-contingent. So the Government set what proportion of your income is then taken away to repay your student loan. All the interest subsidy does is shorten the period that you pay it, it makes no difference to the amount that you pay. So no teacher, under what we are advocating, would pay a penny more per month from their salary than they are doing now, they would pay it for just a little bit longer.

Mr Simmonds

  157. But the total will be bigger, for so many years longer?
  (Dr Barr) The total will be bigger, and if there is a desire to increase the number of maths teachers, it would make perfect sense for the Government to say, for every year that somebody teaches maths, 10 per cent of their debt will be repaid by the taxpayer. So that would be a sensible way of doing it.
  (Mr Crawford) If you have, particularly in the public sector, shortages like that then this 800-odd resource gives you a lot of resource to do a lot of very selective targeting, which can change over time. But this is a matter of detailed policy; what we are arguing is, unless you reform the mechanism you are not going to have this resource then to decide where and how best to target it.

Mr Chaytor

  158. Is not the logic of your argument also that the maximum 25 years repayment period should be abolished as well?
  (Dr Barr) The answer is, that is a genuine policy issue that one could debate. The 25-year forgiveness means that—maybe one should not—

  159. Let me put the question this way. Have you done a calculation to work out the extent of the deadweight involved in limiting the repayment period to 25 years?
  (Mr Crawford) We have, both of us, been working in various countries, we have been advising them; we have been working in Hungary, and they have just had an election this weekend, and part of the feature of the election debate was the massively popular student loan system. To be fair, there was no grant system to start with, so anything was better than the situation they found themselves in. But that system, you repay until you have repaid it all, right up till retirement, but, equally, it has got no starting threshold, they do not have the income tax thresholds that we have, so you pay a very much smaller proportion than our students are paying because you have got a threshold, and you pay it right the way through. And it is very simple, it is very straightforward, and during all the debates in their election, which ended at the weekend, it was massively popular. The Government was claiming a lot of credit for it and not trying to pretend somehow it had not done it.


 
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