Select Committee on Education and Skills Minutes of Evidence

Examination of Witnesses (Questions 320 - 339)



  320. What do you think about them?
  (Professor Floud) We accept that the analysis is logical and that he is making a series of valuable points about the current system, but once you get on to the solutions that are being advocated, I suppose our overall feeling is that it is not as simple as he is suggesting. We believe, for example, that Nick Barr underplays the debt-aversion demonstrated by many students, and underplays particularly the debt-aversion of the extra students who we have to recruit if we are to reach the 50 per cent participation target. Going back to the Chairman's question, we have to think in terms not just of the current situation, but how you will move from a 40 per cent participation to a 50 per cent participation rate. He underplays that particular issue and he suggests—and we accept that this is very much part of the proposal—that part of the benefit of charging a market rate of interest would be—

  321. I understand that it is not a market rate of interest.
  (Professor Floud) It depends what you mean by "market".


  322. He asks for something around 4 per cent and the Government says that it would be 8.5 per cent.
  (Professor Floud) As I understand his proposal, it is that the rate of interest that we would be charged is the rate at which the Government is able to borrow, and together with an uplift for inflation.

  Mr Shaw: He suggests that this would release some further £800 million extra a year on quality and access, and the point you are making about him laying down the idea of debt-aversion—he would say, in answer to that, "absolutely not; we are releasing this money so that we can provide additional financial support to poorer students to combat that". The only real evidence we have in terms of whether additional money will recruit and retain is the educational maintenance allowances in further education. The early response to that suggests that that works. Here was a radical proposal: lots of people, perhaps including yourself, have lined up, saying, "you cannot do this; you cannot do that". Universities UK want an additional £9 billion out of a comprehensive spending review. I do not know whether that includes student finance, but you can quickly see any additional money drying up. There is your £9 billion and additional money for public sector workers. Where are students going to be? Do you think there is going to be a whole heap of extra cash, or is it just a different way of cutting the cake? How long do we sit around pondering this, if someone comes up with something radical, or do you think we should do a bit of tinkering?

  Chairman: Professor Floud, Jonathan is saying you are not being radical enough.

Mr Shaw

  323. There is a lot of tinkering.
  (Professor Floud) My real question is, exactly how radical the scheme that Nick Barr is proposing really is. It clearly is radical in terms of changing from a zero rate of interest to a real rate of interest, and that is accepted. However, the question is how you design the student support mechanisms which this money would be used for. There is nothing in the Barr report about that kind of mechanism. I accept that it would provide additional funding, but it might have disincentive effects. It is accepted that unless you gave substantial remissions for low income earners, like teachers and nurses and so on, then you would have a situation in which people in those situations would be building up larger and larger and larger debts. That is not likely to have a great incentive effect.

  324. Professor, you could do an awful lot with £800 million extra a year. You could say that you have a real shortage of teachers and nurses and you will write off that bit of the debt. It is not just a question of saying it is difficult or that you are not sure who is getting what. Universities UK could have a wonderful debate and there could be all sorts of creativity as to how you would use that money, surely?
  (Professor Floud) It would certainly be possible to use that money to subsidise particular groups within the community, which is what he is suggesting. The point we are making is that whatever scheme you devise, it has to take account of the debt-aversion and disincentive effects which might be created by people believing that they were going to have an even bigger debt than they do at the moment.

  325. Is that your principal objection?
  (Professor Floud) That issue of how to get over to people that there will be all these exemptions, is the problem at the moment. We know that there are a lot of exemptions at the moment, but people do not believe that there are. The Barr scheme does not deal with that problem at all. He rightly says that we need more information. We all know how difficult it has proved to provide that information or see that it is absorbed. The second difficulty is that if you have a scheme that says a rate of interest will not be charged to nurses or teachers, that does not deal with the big problem, which is that people often, when they are going into university at the age of 18, if we are talking about traditional students, do not know what their career is going to be. The problem of assessing the degree of risk and the amount of loans that they are likely to have will still remain. We constantly underestimate the extent to which the new students from social classes C, D and E, are risking so much more than, if I can put it this way, my children, or possibly most children of Members of Parliament.

Ms Munn

  326. We have not established that debt-aversion is stopping people. We do not know that. Baroness Warwick told us that the numbers are holding up. There is a lot of anecdotal information around. One of the important points that was put to us as part of the Barr/Crawford proposal was that one of the problems we have at the moment is that students do not just incur debt through their loans; increasingly they are incurring debt through credit cards, et cetera, which charge commercial rates. Part of the proposal by Barr/Crawford was that they would get more money because the current amounts do not meet their living needs, but at a much lower rate of interest because it would be at the cost to the Government of borrowing. Overall, they would be paying back at a lower rate—although it may be a large amount—and that would get away from some of the large figures we are hearing of which are not all about student loan debt but are about commercial debt. Having spoken again to one person who was a student who had student debt, she said that she had various debts and went for one of these deals that roll all your debts into one without looking at the actual costs and the rates of interest. Part of the Barr/Crawford proposal is that it should be done through this system at a lower rate, which is not the commercial rate, at the cost to the Government, and that that would be better. How do you respond to that?
  (Professor Floud) I can see the attractiveness of that. It would be a subsidy. It is a subsidy just as much as if you provide loans at the Government borrowing rate. It is not as big a subsidy, but it is equally a subsidy as in the current system. There would be advantages in that for many students, but it does not deal with the question of the long-term debt that they are building up and the long-term disincentive effects of that. It is not so much the extra interest that they are paying; it is the build-up of the debt as they have low incomes, perhaps in the early stages of their career, and then—


  327. What the Committee wants to know is this. You start from the base that there is an enormous subsidy to one section of the population through the present system. At least the Barr/Crawford proposals tackle that and shift that on to a fairer basis. Is there anything in the proposals that you are putting into the inquiry that will also address what many people believe is an unfair subsidy who can afford to pay something towards their higher education?
  (Professor Floud) We are proposing of course is that there should be a simple grant scheme, so that people from low-income families should have that certainty when they apply, not all the uncertainty about what their future income is likely to be. There will be a certainty that because they have a low income at this moment, they will have a grant to carry them through university. That seems to me to be a simpler and less risky system for them than the Barr/Crawford proposals, in so far as they are worked out, which I do not think they properly are.

Mr Shaw

  328. How much? What sort of grant do you think one requires?
  (Baroness Warwick of Undercliffe) The grant that we proposed in our submission was equivalent to the current loan that is available; and that would be £4,000.

  329. The £4,000 grant as opposed to a loan, but we know that the average student costs for a year is £10,000; so that is another £6,000 they are going to have to borrow. It is tinkering, is it not? That is what we were advised last week by Margaret Hodge. We can check the transcript. On average, that is what students spend every year.
  (Professor Floud) I am sorry, that is a figure I do not recognise.

  330. That would be sufficient to maintain a student in a year.
  (Baroness Warwick of Undercliffe) The point we are trying to make is, I think, a simple one. For those in the lowest socio-economic groups, there is growing evidence that the perception of debt and the reality of debt as well that they anticipate is sufficient to make them question whether higher education is for them, irrespective of the benefits. Maybe we need to do more to get across those benefits irrespective of the benefits in the long term. We have tried to devise a scheme that for those people, highly targeted, there will be a grant, as opposed to a complicated system of hardship allowances and so on. We have gone on to say that for everybody else, because we believe that students should make a contribution to their tuition because of the advantages they get from their higher education, they should make that contribution on a means-tested basis. Whether or not you do that through a subsidised loan, a heavily subsidised loan or whatever, has to be judged on the basis of whether or not that scheme, the Barr scheme or various others that have been proposed, will act as a further disincentive to those students. That is how we would judge it. We believe students ought to make a contribution, and therefore that is the proposal we made to the Department; but we certainly think that a simple straightforward grant scheme to the very worst off is better than going into a complicated system of hardship allowances.

Ms Munn

  331. How would that be funded? If poorer students are to be given grants, where will the money come from?
  (Professor Green) One way is of rolling up all the complicated support schemes we have at the moment and putting them into a simple grant instead of having multiple schemes for which they have to apply and work out. If we roll it up—I think it is part of the £4,000 calculation of what that would add up to.

  332. So that meets the cost.
  (Professor Green) Yes. Can I just make the point that we are in danger of losing, which is that one of the things we have had to address is what we need to do to the existing scheme to make it work better. Also, we have tried to bear in mind—and this is really the focus on debt and the potential disincentive—is that if we are to deliver the 50 per cent target, we know that we can only do that by going to a different constituency. That is the area where there is difficulty in terms of the current arrangements. We have tried to find ways of addressing that as well. One of the simplest ways is in terms of how information is provided about the risks associated with entering into higher education and how the liability of debt is likely to occur, and the likelihood of employment at the end of it in terms of trying to minimise the concern and lack of information for those who might not otherwise have gone into higher education. That is a different set of arguments from how you improve the existing system and how you may move money around in the existing system with subsidies.

Mr Simmonds

  333. With regard to the £4,000 means-tested grant, did you put a figure in the submission or do you have views as to what level of income a family would have to be earning, either not to qualify or to qualify for the grant, to attract the type of people into higher education that you perceive are being put off?
  (Baroness Warwick of Undercliffe) No, we do not. We stress the level of benefit. We do not address that per se in money terms. We suggest ways in which the very worst off might be identified through the various welfare benefits; but we have not put a figure on it. Can I go back to the other point, because we are approaching this on the basis—and this may have been what has bedevilled all the discussion—on the basis that this is going to be a resource mutual change. Nick Barr is assuming that because you change the rate of interest subsidy, that that will release resources currently paid by Government, but not increasing the amount of resource available. It seems to me that if one is going to radically change the system, within the current constraints that the Government has imposed, i.e. that we stick with the current fee level, and that that is not changed, then it is very difficult to see a solution, even the Barr solution, which is cost-neutral.

  Jeff Ennis: You have suggested some form of higher education maintenance and building on the success of that post-16. Is that the case? What would have to be the differences, or would there be a need for differences and more flexibility in higher EMA than at present?


  334. Is it an EMA?
  (Professor Green) We certainly have not called it that but it is the same principle behind it. You give an assurance and confidence to people at the point of entry rather than at the point when they commit themselves and then find out if they can afford to go. Certainly, the principles behind it are the same, and it gives them a fresh start. I wonder whether it is enough. You asked a question, Chairman, about evidence, and all the evidence is that in terms of retention, if you could get people to survive the first year, then you have a greater chance of them surviving later on. Certainly, that principle does underpin what we are pressing here.

  335. I do not think Mr Ennis is suggesting it is at the same level.
  (Professor Green) No, I said it was the principle behind it.

  336. There is a suggestion of a move towards EMA in higher education. It does sound as though you are moving to that position.
  (Professor Green) The principles behind it are the same in terms of giving that security up front to people so they know exactly what cash is available for the first year.

Jeff Ennis

  337. In supporting that principle, do we need to improve the model it is based on to cater for higher education students, or do we need to change it slightly; or is it basically the same model?
  (Professor Green) We have not looked at that as an issue. I have to pass on that one.

Mr Pollard

  338. I am bothered about the totality of debt, and part of that debt is credit card debt, which is an increasing proportion of everybody's daily lives. Credit card debt has to be paid as you go, so that will have a disproportionate effect on students. I thought that the Barr/Crawford approach looked at the holistic thing and gave a lump of money so that people could live through the piece. I am bothered with that. If you have got to pay credit card debt as you go and you get up to £3,000 and you get another card and another £3,000, which is what is happening in reality—that makes the Barr/Crawford proposal very attractive. You would have a lump of money; you could live reasonably well and perhaps top it up, whereas your approach of £4,000—you cannot live on £4,000 and you have to top that up in some way, and that will be either with credit card or a lot of work. You say in your evidence that if a student works, it can have a detrimental effect—although that is anecdotal. That is definite. If you use a credit card, that is the most expensive way, barring a loan shark. Does that not support the Barr/Crawford approach?
  (Professor Green) I return to the point that if we are dealing with the target groups rather than the existing groups, the evidence so far is that the perception of debt is a disincentive to entry.

  339. Numbers are holding up. Diane Green says that!
  (Professor Green) We are trying to reach out and increase the numbers. That is why I said that we must be very clear about the difference between the existing cohort that we have now and the ones that we want to reach out to. We are concerned that whatever we do in terms of tidying up the existing arrangements does not act as a disincentive to those who want to do it now. We do not have hard evidence but we do know that some of the target groups are debt-averse. Certainly, in terms of the ethnic minority students, they will not enter into debt. We know that for a fact, and there is a problem there. Our proposal is that you get over that problem, because it is not about debt—it is a grant in terms of getting them into higher education. It will not cover all their spending needs, and no-one is suggesting that, but at least it will give them a platform on which they can do the calculation rationally as to whether or not they are prepared to go over and above that and enter into any further debt. There is a clear platform. The Barr proposals do not do that; it is still a debt and that is the major worry we have.
  (Professor Floud) I am puzzled by the argument that the Barr/Crawford proposals would enable people not to have credit card debts, because that is another subsidy. It should not be presented as a "no subsidy" situation. If you are going to replace borrowing from Barclays or Visa by borrowing from the public purse, that is a subsidy, so that many of the principal objections that Barr has to the current situation would apply equally in that situation.

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