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
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,
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.
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
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
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;
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.
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
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
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.
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
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.
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".
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.
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".