Select Committee on Education and Skills Sixth Report


Critical analyses

  74. On the basis of the evidence which we now go on to review, we believe that the current system of student support has failed in three important respects. It has not made a significant impact on the social profile of entrants to higher education; it is not clear and easily understood by target populations, and it has not delivered a progressive and socially equitable means of supporting students in higher education.

75. Loans to students from the Student Loans Company are subsidised from the public purse, at a zero real rate of interest. The cost to the Exchequer is estimated at 30 to 35 pence in every pound loaned.[83] A quarter of the maximum loan entitlement is means­tested. Graduates start to repay the capital when their earnings reach £10,000, plus annual inflation, currently 2.3 per cent. The higher the graduates' incomes, the more they pay. The better paid thus become free of loan debt sooner than their less well­paid contemporaries. There may therefore be also be a disincentive for graduates to apply for jobs in the public sector which are generally paid at lower rates. This could act against Government objectives to increase numbers of key public sector workers including teachers, nurses, police and social workers.

76. Economists Professor Nicholas Barr and Mr Iain Crawford have argued that if the indiscriminate interest rate subsidy were abolished for those who could afford to pay a higher rate, the money saved could be used to provide targeted bursaries and grants for those in greatest need, promoting the Government's social inclusion objectives. They suggest that because of the cost of the interest subsidy,[84] the inevitable means-testing and rationing of loans leads to a situation wherein students are provided with insufficient funds to meet their needs. Students who are additionally dependent upon, but fail to receive, full parental contributions have no other option but to use more expensive commercial credit sources or to work to support their studies.[85] Furthermore such parents may well have to fund their children through commercial loans leading to resentment and hardship for the family. Fear of debt by working class students is a significant reason associated with barriers to widening participation in higher education yet too little attention has been given to the role of parents. If the experience of working class parents is increased levels of debt in order to maintain their children this may well deter them from speaking positively about the benefits of higher education to other members of their local community. Word of mouth should not be under estimated.

77. In calculating the cost and value of student support it is necessary to include the cost to the Government of borrowing the money which is made available to students through the student loans system. This has in the past been a hidden subsidy and not explicitly taken into account when considering the balance between the individual beneficiaries of higher education and society. We recommend that the Government's borrowing costs should be recognised explicitly in the student support review and in future accounting practices.[86]

78. Barr and Crawford have proposed an alternative model of student finance based on student loans, with interest levied at a rate equivalent to the Government's borrowing rate. They argue that by eliminating the blanket subsidy, approximately £800 million[87] could be released for widening access, providing funds for bursaries for students from the poorest homes; for targeted interest subsidies or loan forgiveness for targeted professions;[88] for universities to support non-traditional students; for raising aspirations in schools and for investment in improving and maintaining the quality of the tertiary sector. Additionally, because such loans would not need to be rationed, access to loan support could be extended to the further education sector, offering one way of addressing the disparity in access to student support between further and higher education.[89]

79. It should be borne in mind that a system of deregulated fees and unsubsidised student loans has been operating in New Zealand since 1992, analysis of which has revealed patterns of default on loans, largely linked to graduates leaving the country and particularly high levels of debt accruing to students pursuing certain programmes. A report produced by the New Zealand Parliament's Education and Science Committee[90] provides a valuable commentary on the New Zealand context and we commend this to the attention of the Government.

80. The Department's rejection of the Barr/Crawford model[91] rests on three points. First, that the interest rate they assume is an underestimate of the Government's real cost of borrowing. Secondly, that a rate of interest above inflation would bring student loans under the scope of consumer credit legislation, the requirements of which could not be easily met under the current loan recovery arrangements, and that dis-application of consumer credit legislation would have implications for UK compliance with relevant European legislation. Thirdly, the Department also argues that a higher rate of interest would entail the unreasonable extension of pay back periods, particularly for low paid graduates.[92] We found that the views advanced by Barr and Crawford provide a challenging critique of the current system and that their proposals, and the responses to them from the Government and Universities UK, are worthy of further detailed consideration.

81. The Government's cost of borrowing is necessarily a variable figure and implies a variable rate of subsidy and level of funds available for reinvestment. Acknowledging this does not, in our view, undermine the need for careful consideration of the model.

82. We are yet to be convinced that the Government's concerns regarding domestic and European consumer credit legislation are likely to be a significant issue in the development of future policy and we urge the Department to look into this matter further.

83. It is clear to us that the current zero real interest rate for student loans subsidises those from affluent backgrounds while providing insufficient funds to those from poor or otherwise disadvantaged circumstances.

84. It is our view that there is considerable scope for development of models of student support which are based on adjustable interest rates. Such models would enable fine tuning according to prevailing economic conditions or policy in relation to particular groups or subject areas.

85. Both the short time frame since the implementation of current student support arrangements and reliance in much of the research on students' statements of their intentions and their attitudes to study, debt and term-time working, mean that there is relatively little hard information at this stage on the impact of current schemes. Some important indications that students' choice of location and institution for higher education is becoming increasingly constrained by issues of funding have emerged, with evidence of London based students from disadvantaged backgrounds and minority ethnic groups tending to live with their parents and study near to home.[93]

86. Professor Claire Callender's work has provided a substantial amount of the evidence in the debate on student support and the impact of debt. Her recent work for the Mayor of London identified a trend towards increasing levels of segregation:

    "If new universities rely increasingly on a local intake and students from ethnic minorities and those from low-income backgrounds while the 'old universities' recruit nationally from a predominantly better-off white population there is a very real danger that universities in London will become segregated on class and ethnic lines".[94]

87. The prospect of such segregation in our universities runs counter to widely held aspirations for a more inclusive society. Insofar as the apparent trend towards class/ ethnicity based segregation may be exacerbated by arrangements for student finance it will be necessary for any future development of the student support system to give this issue explicit attention.

88. Professor Callender has written extensively on students' attitudes to debt and in particular on notions of debt aversion and the disincentive effect of student loans. This issue is particularly challenging in terms of gathering hard data on which to base conclusions.[95] The Student Income and Expenditure Survey 1998-99 revealed that "those most likely to be deterred by the financial disadvantages of student loans were students from the lowest social classes, especially women ¼ some 48 per cent of students from the lowest social classes expressed concerns about borrowing, debt and repayments compared to just 34 per cent of students from the highest social classes, and 37 per cent of all students".[96]

83   Barr and Falkingham (1993, 1996) cited in Ev 25 paragraph 35, found that for every £100 the government lends, only about £50 is repaid. Of the missing £50, £20 is not repaid because of fraud, early death, and emigration (all of which have a relatively small effect), and mainly because some graduates have low lifetime earnings and so never repay their loan in full, and £30 is not repaid because of the interest subsidy. See also Q142  Back

84   Estimated at £700 million. Ev 25 paragraph 37 Back

85   Estimated at 20 per cent in Student Finances: Income, Expenditure and the Take­up of Student Loans Among Full­ and Part­time Higher Education Students in 1998/9, Claire Callender and Martin Kemp, Department for Education and Employment, RR213, December 2000 Back

86   Ev 25 - 26 paragraphs 38 - 39 Back

87   Assuming a Government borrowing rate of 4 per cent Back

88   For example, teaching/nursing/social work, depending on the social/political priorities of the day. Back

89   Ev 28 paragraph 57 Back

90   Inquiry into student fees, loans, allowances and the overall resourcing of tertiary education Report by the Education and Science Committee of the New Zealand Parliament, 30 October 2001 Back

91   Ev 88 to 89, For example: QQ 235, 237, 251 Back

92   Q 257 Back

93   Q 364 Back

94   Students studying in London: An analysis of data from the student income and expenditure survey 1998/99, Prof Claire Callender with Martin Kemp, South Bank University, for the Mayor of London, April 2002, page xi Back

95   Students studying in London, Callender and Kemp, April 2002, page 23 Back

96   Students studying in London, Callender and Kemp, April 2002, page 25 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 11 July 2002