20.1 If our vision of a learning society is to be realised, students will have, as we make clear in Chapter 18, to make a greater investment in their own futures. It is also necessary, if our vision is to be realised, for the state to provide equitable financial support for students who want to study in different ways or whose personal circumstances require it.
20.2 The country should have a student support system which, as far as possible:
20.3 This is not straightforward to achieve given the diversity of students and study patterns which need support.
20.4 As we have already shown, more funding is needed for higher education. Levelling up the support for those types of students or patterns of study which are not currently well-supported would be very expensive, and impossible to achieve within the constraints of public funding. It might also risk substituting public subsidies for contributions which are currently coming from employers towards part-time study. Reducing support for those groups who are currently better supported could lead to severe financial problems for individuals, especially if they had not had time to prepare for changes and might thereby reduce participation, especially by students from the least well off backgrounds. Consequent changes in behaviour could be destabilising in their effects on institutions. Our recommendations have, therefore, been tempered by pragmatism.
20.5 In this chapter we examine how far it is feasible to provide better support to certain groups of students:
In the light of our conclusion that graduates in work who have benefited from a full-time undergraduate course should make a greater financial contribution in the future, we then consider:
20.6 As we have already noted, one message which emerged very strongly from the evidence we received was concern about the inequity of treatment between full and part-time students, in terms of the level of public support for tuition costs. For the full-time undergraduate student tuition is currently free, while for the part-time student a fee is generally charged (though some institutions waive the fee in certain circumstances). These fees do not generally cover the full cost of part-time courses which are still heavily subsidised through the Funding Bodies block grants. As will become evident later in this chapter, there is a good case for expecting graduates from full-time programmes to make a contribution to their tuition costs, not just, as now, to their living costs. If the Government accepted the case and implemented the proposal, the disparity in treatment between full and part-time undergraduates would be much reduced.
20.7 We have considered whether part-time students should have access to loans to meet a contribution to the tuition costs of their higher education in the light of our later recommendation that full-time students should be supported in this way. We are conscious of the potentially heavy cost to the public purse involved in making subsidised loans universally available to part-time students, given that the vast majority of this group currently pay fees despite the unavailability of loans (other than Career Development Loans, which are subject to credit-vetting and to partly commercial terms). As we noted in Chapter 18, many part-time students currently have their fees paid by their employers a contribution which we would certainly wish to see maintained. We cannot recommend that these costs, even on a loan basis, are transferred to the Exchequer. One solution would be to make loans available only to those part-time students on low incomes. Means testing of a substantial number of part-time students would, however, be very labour intensive to administer.
20.8 An alternative to providing loans to help part-time students to meet their contribution to tuition would be to waive the fee altogether for students in certain low income groups. A number of higher education institutions already adopt this approach. It would mirror the position in further education in England, where adult students in receipt of Jobseekers Allowance (JSA) or certain family benefits are excused the fee charged to other students, and the funding shortfall is made up by the Funding Council. Although this would not help those part-time students who are on low incomes but not on benefit, it would provide an incentive to part-time study by the unemployed, and is likely to be relatively straightforward and cost-effective to administer.
20.9 We believe it is important that the Government puts in place arrangements to ensure that part-time students who are in receipt of benefits are not prevented from entering higher education because they cannot afford the fees. On balance, we have concluded that the most appropriate approach would be a scheme where the Funding Bodies provide funding to allow institutions to remit fees for certain students. We estimate that the cost in 1998/99 would be some £15 million, and that the long term cost would be some £50 million a year.
20.10 Part-time undergraduates are currently treated differently from their full-time counterparts in respect of living costs as well. Part-time students other than a small number on part-time teacher training courses are ineligible for mandatory grants and student loans, and for payments from the Access Funds (funds for relieving hardship at the discretion of individual institutions). They are however eligible for social security benefits, including the Jobseekers Allowance (JSA), so long as they meet certain conditions relating, in particular, to availability for work.
20.11 We have considered whether loan or grant arrangements for supporting full-time students living costs might be extended to part-time students but have concluded that there is a high proportion of part-time students who are in employment and therefore able to support themselves. Moreover it would be extremely expensive. Given the other requirements for additional funding which we have identified, we do not believe that this should be a priority call on any additional funding for higher education. We are concerned, however, that the current social security benefit rules are acting as a disincentive to part-time study for those who might reasonably be assumed to have the most to gain: those who are unemployed.
We have already recommended that the size of the Access
Funds should be doubled and we believe that the scope of
those enlarged Funds should be widened to include
20.13 There has been rapid growth in the last few years in the number of students on taught postgraduate courses both full-time and part-time. Such students are subsidised by the Funding Bodies but, in the most cases, also pay a fee from their own resources. We see this contribution as desirable and would not want to disturb it, particularly when there is already a scheme, the Career Development Loan Scheme, which benefits some postgraduates. We received a few representations that postgraduates should be entitled to support for their living costs on the same basis as undergraduate students. Although we see merit in the Government ensuring, as for undergraduates, that the unemployed are not discouraged, we do not see any further extension of living cost support for postgraduates as a priority.
20.14 We also heard concerns about the potential impact of increased contributions being required towards the cost of undergraduate study. Some felt that graduates with debts would be discouraged from further study. We believe that the answer to this lies in the design of mechanisms for the collection of contributions which are sensitive to an individual graduates circumstances, and do not over-burden those on low incomes.
Students in institutions which are not publicly funded
20.15 We received a number of representations about the position of students studying dance, drama and related subjects and the previous Government asked us to advise on this subject. The problem arises because provision for these subjects is made mainly in institutions which do not receive public funding. The same is true of a number of other subjects, for example, some forms of alternative medicine. In some cases the students in question are eligible for mandatory awards, but the fee paid through mandatory awards covers only a fraction of the cost of tuition, and the student has to bear the rest. Others may receive discretionary grants from local education authorities, but these have greatly reduced in number in recent years and whether a student can get one depends on where he or she lives. The situation is further complicated by the fact that much of the provision is at further education level, but some is at higher education level. Although the former is technically outside our remit, we did not feel it was sensible to look at the higher education provision in isolation.
20.16 We suggest in Chapter 19 that additional institutions should be brought into the public funding net only if they can meet certain stringent criteria. We think it unlikely that many of the institutions currently outside the net would be able or willing to meet the criteria. This leaves their students unfairly disadvantaged relative to others who have chosen other subjects, for example music, which are catered for mainly in the publicly funded sector.
20.17 The previous Government had already accepted that there is a problem and had established an interim bursary scheme for dance and drama students. We believe that a long term solution involving public funding is the only way to secure equity for these students. We propose that the Government should provide a limited number of vouchers (or bursaries or scholarships) with the number offered being related to some assessment of the national need for people trained in the relevant area. The vouchers should be valid only at non-profit-making institutions whose quality and standards have been independently attested, for example by the Quality Assurance Agency. The vouchers should be large enough to cover the reasonable costs of tuition, as determined by the Government. Once students are over 18 they should be required to contribute the same sum each year towards the cost of tuition as higher education students, with the assistance of a loan, and should be eligible for living cost support on the same basis as full-time undergraduate higher education students.
We recommend to the Government that, once the interim bursary scheme expires, it establishes permanent arrangements for the equitable support of students of dance, drama and stage management at institutions which are not in receipt of public funds.
20.18 We have made proposals for a new qualifications framework based on credit points to enable students to accumulate credits towards an award over time. Such a framework supports discontinuous periods of study. It is also feasible for the Funding Bodies to support such study through their block grants. Current student support arrangements for full-time undergraduates make it difficult, however, for students to stop studying for a while and then to return. Generally, if they do, they lose their entitlement to a mandatory award. In future, there must be a framework to support individuals to study to degree level (H4) in a flexible way. In order to allow the Government to control public expenditure, there has to be some limit on a students overall entitlement to public subsidies. The control at the moment comes from the rule that a student may not receive more than one mandatory award. The recommendation in Chapter 7 for the introduction of a unique student record number and the recommendation in Chapter 21 for a single Student Support Agency, should make it feasible, in future, to track an individuals use of their entitlement, even if they interrupt their study.
Contributions from graduates in work
20.19 As we show in Chapter 17, more resources are needed for higher education. We now turn to consider how graduates of full-time programmes, who are in work, could make a greater contribution to the overall costs of their higher education. While the evidence discussed in Chapter 18 provides a strong case for graduates in general contributing towards the costs of higher education, it provides no means of quantifying what their share should be or whether they should contribute to living costs or tuition costs. In looking at options we have therefore taken a largely pragmatic approach, having regard to:
20.21 There was almost universal agreement amongst those we consulted including student representatives that the solution to these problems was to replace the current arrangements for the repayment of maintenance loans, with their fixed term mortgage-style repayments, with an income contingent system in which payments are based on a percentage of the graduates income. The main advantage of such schemes which are usually described as income contingent schemes is that they fix monthly payments at a level judged to be affordable in relation to an individual graduates income. Instead of all graduates with an outstanding loan of a certain size paying the same monthly amount once their income has reached a threshold, those on the lowest incomes pay the least each month and those on higher income pay more. The higher a graduates income, the sooner he or she will complete their payment. Unlike the current arrangements, income contingent schemes provide reassurance to those entering higher education that they will not face unmanageable repayment burdens, whatever their post-graduation income.
20.22 The current student loans scheme for living costs is based on mortgage-style repayments, but with deferment for those on lower incomes. Once a graduates earning reach 85 per cent of national average earnings (£15,792 in 1996/97), payments start continue over a fixed period five years for those with up to four loans, and seven years for those with five or more loans. The monthly amount repaid depends on the total size of the debt rather than on the borrowers income (once it exceeds the threshold for payments). We understand that, when the loans scheme was first introduced, the Governments intention was the payment periods would be extended over time as the average level of debt increased, in order to keep monthly payment levels manageable. However, to date, no such extensions have been implemented.
Many of those we consulted felt that these arrangements
do no sufficiently recognise differences in
graduates incomes, and that if graduates were
required to make a greater contribution under present
payment arrangements, this would create a major barrier
to participation. While the relatively high threshold
protects the position of graduates on low incomes, there
was a general consensus that significantly longer payment
periods would be necessary in the future to prevent
payment causing real financial problems for many
graduates. In addition, a number of those submitting
evidence drew attention to the burdensome nature of the
payment regime for those whose income only marginally
exceeds the threshold. This is illustrated in Table 20.1, which shows
that the heaviest burdens in terms of percentages of
income fall on those with incomes just above the
threshold. In practice, graduates are not currently
making payments of this order because the recent shift
from grants to loans has only just been completed and it
has not yet been possible to accumulate debts of as much
as £5,000. Once the current loans scheme reaches a
steady state there will, however, be graduates in this
position unless the terms for payment are changed.
These points apply equally whether a contribution from
graduates in work is for living costs or tuition costs.
We strongly support the weight of opinion in the evidence
that any contributions should be on an income contingent
basis in future.
20.25 One obvious way of achieving an income contingent contribution would be through a graduate tax.
20.26 Under this option all those who had undertaken a publicly-subsidised programme of higher education study would be liable to pay an income tax supplement. This could, in principle, apply at all tax levels or be applied at a separate threshold (or thresholds) from the standard bands of income tax. It could, in principle, be extended to existing as well as future graduates. We have not examined that extension further because of the apparent difficulty of defining a graduate retrospectively and then identifying all individuals caught by the definition.
20.27 We were attracted to the option of a tax on future graduates because:
However it also has a number of drawbacks:
20.29 We have concluded the disadvantages are such that we do not support a graduate tax as the means of providing contributions from those who have undertaken courses of study in higher education. However, we consider further below options which have some features of a graduate tax.
A deferred contribution option
20.30 We have considered a deferred contibution option which has some features of both a graduate tax and a loan scheme but develops to its fullest extent the notion of a contribution. The contribution in this model does not link payment to a specific loan or debt, although a ceiling would be placed on the maximum level of contribution so that it was not open-ended like a graduate tax. Within the capped ceiling a graduate in work would make a return to society according to his or her earnings over a pre-determined number of years.
20.31 There are various ways in which such a scheme could be devised. For example, under one version:
20.32 This scheme shares the advantages of a graduate tax, for example in the income raising potential, and has two additional advantages:
20.33 The main disadvantage to the scheme is that it would not produce an additonal flow of money for higher education in the short term, so we considered whether there were variants of it which would do so. One option would be to give individuals the choice of either paying a pre-determined proportion of the costs of their higher education up front or of making contributions once in work, on the same basis as outlined above. But the sums they produced would be modest in the short term.
20.34 Both these options merit consideration for the medium term, but they require time for development and broad informed debate about how they would be implemented.
Contributions supported by loans
20.35 Contributions from graduates in work via loan repayments in their income contingent form, enjoyed a large measure of support from those submitting evidence to us. That support was mainly focused on an option under which the current grants for students living costs would be converted into loans. Loan-based schemes would enable individuals to choose either, if they had the resources, to make the required contribution at the time of study, or to take out a loan which would be repayable after graduation. The detailed basis of such loans and their implications for individuals are considered in Chapter 21. In carrying out our analysis, we have sought to take account not only of the existing student loan scheme run by the Student Loan Company in support of student living costs, but also of the particular experience of Australia and New Zealand in seeking graduate contributions. We also looked at the work of the National Commission on Education, although they did not have the benefit of the facilities for modelling options which we have developed.1
20.36 Loan-based contribution schemes have the following principal benefits:
20.37 The principal disadvantages are:
Alternative forms of contributions supported by loans
20.38 In the evidence submitted to us there was a widespread view that, if graduates were to contribute more, this should be achieved by transferring the whole of the funding for students living costs, which is currently made up of a mixture of grants and loans, to 100 per cent loans. There was opposition to the extension of student or graduate contributions to include tuition costs. Others felt that tuition contributions should be resorted to only if, after transferring support for students living costs from grants to loans, there was still a shortfall in higher education funding.
20.39 This opposition to seeking a contribution towards tuition costs from graduates was despite the recognition that additional public funding for higher education was unlikely to be available, in the short term at least. Many of those submitting evidence to us wanted greater equity of treatment between full and part-time undergraduate students. But they did not see this being achieved by asking full-time students to make a similar contribution to that already made by part-time students.
20.40 We do not underestimate the strength of feeling on the issue of seeking a contribution towards tuition costs: nor do we dispute the logic of the arguments put forward. A detailed assessment of the issues has, however, convinced us that the arguments in favour of a contribution to tuition costs from graduates in work are strong, if not widely appreciated. They relate to equity between social groups, broadening participation, equity with part-time students in higher education and in further education, strengthening the student role in higher education, and identifying a new source of income that can be ring-fenced for higher education.
We have, therefore, analysed the implications of a range
of options against the criteria set out in paragraph 20.2. There is a
wide array of options from which to choose, ranging from
asking graduates to contribute only to their living costs
through to asking all graduates to contribute to their
tuition costs. We have chosen to examine four
options in depth.
20.42 Under Option A, which we call the maintenance contribution option, students would no longer be eligible for grants to support their living costs (apart from some specific exceptions such as the Disabled Students Allowance). Living costs would be supported entirely through loans, which would be available equally to all eligible students, regardless of family income. No contribution to tuition costs would be sought: as now tuition would be funded 100 per cent by public grants.
20.43 At the other end of the spectrum is Option D, which we have called the tuition contribution with restoration of maintenance grants option. In this option, support for students living costs would be restored to the arrangements which prevailed before the introduction of the current student loan scheme. This means that support for living costs would take the form of a grant equal in value to the current grant plus loans package, and would be means tested against parental income. All graduates would be expected to make a flat rate contribution to their tuition costs, either at the point of study or, once they were in work, by repaying a loan on income contingent terms.
20.44 Between these two options we have two others. Option B is the tuition contribution option. This keeps support for living costs in its current form, that is half in the form of universally available loans (but in future to be repaid on an income contingent basis), and half in the form of means tested grants. All graduates would be required to make a flat rate contribution of about 25 per cent to tuition costs, at the time of study or by repaying a loan on an income contingent basis when in work.
20.45 Option C is the means-tested tuition contribution option. This would have the same arrangements for living costs as the maintenance contribution Option A, that is all support for living costs would be in the form of loans available to all students (apart from specific allowances such as the Disabled Students Allowance which would continue as grants). In addition, students would make a contribution of up to 25 per cent to tuition costs, the size of which would be dependent on parental (or the students own) income. No loans would be available to meet the tuition costs.
20.46 The options differ principally in four respects:
|Notes: Under current
arrangements, families with a residual income of less
than £16,580 are not assumed to make any
contribution; those on residual incomes above around
£35,000 are assumed to make the maximum contribution;
and those on residual incomes in between contribute
on a sliding scale. In the table a middle
income family could, on current scales, have an
income in the range £2025,000. Residual income is
gross taxable income minus certain allowances eg for
dependent adults other than the spouse, interest payments
which qualify for tax relief etc. For simplicity
rounded figures are presented. Maximum public support for
living costs is assumed to be £10,000 over
three years and the tuition contribution,
where appropriate, is assumed to be
£1,000 a year.
This table illustrates that the maintenance
contribution Option A differs distinctively from
the other options in completely removing the obligations
on middle and higher income parents or families to
contribute, and transfers that obligation to graduates.
In comparison with the present arrangements, the
tuition contribution with restoration of
maintenance grants Option D substantially increases
the contribution required from parents or spouses whose
incomes are above the means testing threshold, including
those on middle incomes.
20.50 In practice, it is unlikely that all parents in the middle and higher income categories would be able to make these extra contributions, particularly if they were introduced quickly so that families had not had time to save for the additional contribution. Some of them would probably themselves borrow or underwrite commercial loans for their children.
20.52 The level of graduate commitment will depend on the precise details of the contribution scheme selected and on any commercial loans taken out by individuals. Table 20.4 below sets out the maximum public loan commitment for graduates who have followed three years of study away from home outside London. Some students would be likely to have commercial debts on top of these.
This table complements Table
20.3 in showing the shift in burdens from individuals
and their families to graduates, and vice versa in the
case of Option D.
20.54 Chart 20.2 shows how the average graduates outstanding commitment would change as a percentage of income over time under the existing system (but with income contingent payments) and under the tuition contribution Option B. To give a sense of the size of the burden, the chart also shows the debt burden associated with a typical residential mortgage. None of the options appears to produce an unmanageable commitment.
distribution of subsidies between different social groups
20.56 Chart 20.3 shows, for the year 2006/07, how subsidies would be distributed between groups under current arrangements.
Table 20.5 summarises the impact on public subsidies for
the poorest and most well-off under the four options,
compared to the current position.
20.58 Only Option D is likely, in practice, to secure a shift in the current balance of public subsidies from the families of the most well-off to the poorest students. Even under this option, if the tuition contribution was increased there might well be some decrease in public subsidy for the students from the poorest families. This result is hardly surprising since the overall objective is to increase the contribution made by individual graduates in work.
20.59 On the other hand, the maintenance Option A clearly increases public subsidies to students from high income families at the expense of the students from the lower income families. The former gain access to loan subsidies while the latter lose grant.
Financial contribution to higher education of the different options
20.60 We have examined the overall financial implications for the Exchequer of the different options using the model developed for us by London Economics. More details can be found in Report 12. The results are summarised in Table 20.6:
Figures in brackets are net additional costs to the Exchequer.
Cash accounting costs all loans advanced as public expenditure in the year they are made and all repayments as negative public expenditure in the year they are received. Resource accounting counts as public expenditure in the current account only the implied subsidies in the loans (including interest subsidies, provision for default and other types of non-payment).
In looking at the figures it is important to appreciate
that they are sensitive to underlying assumptions,
especially for the short term the assumption about what
proportion of students would take up loans. We have
assumed that take up rates would rise modestly if an
additional contribution was sought from individuals. Over
the long term the figures are sensitive for example to
assumptions about student numbers and rates of student
The table illustrates two points:
20.63 Option A produces low yields on both a cash and a resource accounting basis. The particularly poor long term performance of Option A under resource accounting may appear surprising. Option A includes the highest overall level of student debt, which means that many graduates would repay over an extended period. As a consequence, it also includes the greatest continuing subsidy in the form of a zero real interest rate. Under resource accounting the difference between the interest rate charged to graduates and the cost of Government borrowing is scored fully and brings the funding released by Option A down to a modest level. We discuss in Chapter 21 the merits of a modest real rate of interest which would make Option A more attractive when measured in resource accounting terms.
20.64 In Option C, which also includes high levels of graduate debt, the impact of the interest rate subsidy is offset by the continuing flow of tuition contributions from higher income families which are not supported by loans. Option A gives, therefore, a useful illustration of a general point. Simply increasing the size of the graduate contribution will not, if it is supported by income contingent loans, necessarily increase the flow of funds to the Exchequer or higher education. Higher repayments from some graduates may be offset by long term interest rate subsidies to others.
20.65 We have concluded that any option which comes close to releasing the public funds necessary to meet the funding requirements identified in Chapter 17 would produce either an unacceptable burden on graduates and on families of modest means, or would lead to a level of graduate commitment, regardless of income contingent payments, such that demand for higher education and participation would be seriously affected. Indeed, one of the implications of income contingent payments is that they limit the rate at which resources flow from graduates, regardless of the level of graduate commitment. We consider the implications of this conclusion below. It is essentially a consequence of the relative high level of continuing grant subsidy inherent in any scheme which protects graduates who remain on low incomes throughout their careers, and ultimately forgives their commitments. This is an important finding which we do not believe is generally understood in the public debate on these issues.
20.66 Making a decision on a preferred option involves a judgement about the relative weight to be given to the various criteria in paragraph 20.20. It also requires a careful scrutiny of the evidence. In going through that process we all changed and developed our views: we did not end up where we started.
20.67 As the figures show, seeking an increased contribution from graduates towards living costs, as in Option A:
This led us to focus on options involving a contribution by graduates to tuition costs.
20.68 The evidence drives us to favour options which involve a contribution by graduates in work to their tuition costs for three further reasons.
Option C produces a high yield in the long term on a cash
accounting basis and is more equitable than Option A. But
higher income parents are required to pay for
their student childrens tuition when we feel
that this should be a responsibility of the graduate.
Option D is equitable in concentrating subsidies on those
from low income families, but, like Option C, expects a
substantial contribution to come from higher income
20.70 Having considered the main features of the four options, our own preference is, on balance, the tuition contribution Option B. In our view this option produces the best balance between seeking a continuing contribution from higher income individuals and their families and from graduates once they have completed their course of study and entered employment.
Level of graduate
contribution to tuition
20.72 We were attracted by the approach adopted in the further education sector in England in which students over 18 years of age are assumed to pay a fee equivalent to 25 per cent of the average level of funding across all subjects. The options we have examined include ones in which the contribution is a flat rate for each year of study and others in which the contribution is means tested.
20.73 We believe that a standard contribution should be charged, regardless of subject of study. The risk otherwise is that students, particularly perhaps those from poorer families, would choose cheaper subjects, rather than those which met their, or the nations needs. Differential contributions by subject could cause particular problems in the areas of science and engineering where there is already a shortage of good applicants. Our preferred approach would ensure that access to prestigious or popular programmes continued to be determined by academic merit, and not by ability to pay.
20.74 We also considered whether the contribution should be the same for all years of study or should be lower in the first year or two, to encourage access to higher education and take up of programmes to levels H1 and H2, that is at sub-degree level. To balance this a higher contribution would have to be charged in subsequent years. We concluded that we preferred the simplicity of a standard contribution for all years of study.
20.75 We have considered the concerns of students and others that with a graduate contribution scheme, it would be open to any government to increase unilaterally the proportion of tuition costs paid by graduates. We believe that this concern is based on experience of the Australian Higher Education Contributions Scheme (HECs), and the corresponding New Zealand scheme, where graduate contributions were increased suddenly. In a democracy no Government can tie the hands of its successors on such matters, but we believe that the issue is so important that any changes should be subject to rigorous public review. We believe that an independent Committee should be appointed to review any proposal to increase the proportion of the tuition cost to be met by a graduate and that any such increase should be subject to the affirmative resolution of both Houses of Parliament.
20.76 In the light of our conclusion that graduate contributions alone cannot reasonably be expected to fill the funding gap, we have considered the question of means testing carefully because of its scope to release substantial additional resources from individuals and their families for higher education. One argument suggests that, because all students are adults, support for their higher education should not be dependent on their family income. It is, after all, graduates themselves who benefit, not their parents. An alternative view accepts that parents who can afford it should have a continuing obligation to their children until they graduate. Being pragmatic, we do not see that it is practical to dispense with means testing altogether. The maintenance Option A which we have explored shows that the effect of doing so is, on current accounting rules, to increase public expenditure sharply in the short term. Even our tuition contribution Option B, which retains means testing for half of the support for living costs, does not generate large savings in the short term under current accounting rules.
20.77 If a means testing approach were adopted, one approach would be to means test access to the new 50 per cent living cost loan made available under Option A. This would, however, generate little additional money for higher education, especially in the short term. We have therefore explored the impact of adding additional means tests to two of our Options, B and C. The means tested version of Option B would subject the existing loan for half of students living costs and the loan for the tuition contribution to a means test against parental income. The position of students from lower income families would be unchanged. In contrast those from higher income families would receive no public support for living costs or the tuition contribution at all.
20.78 The means tested version of Option C would subject half the loan for living costs to a means test. Students from poorer families would continue to be eligible for 100 per cent loans for living costs while those from higher income families would have to look to their parents for half their living cost as well as their tuition contribution. These two variants are summarised in Table 20.7.
Requiring additional contributions would bear heavily on
many families, who would struggle to find contributions
of this magnitude. The annual contributions are larger
in some cases than those we exemplify in Chapter 21 for graduates themselves
when on the same income. Table 20.8 shows the
implied additional contributions
on a comparable basis to Table 20.3.
It is inevitable that some parents would be unable or
unwilling to provide the necessary funding especially if
the change were introduced in 1998. They might, instead,
underwrite a commercial loan taken out by the
student, but students in that position would not secure
anything like such favourable loan terms as would be
attached to publicly-subsidised loans. Other students
whose parents could not help in this way would probably
be denied access to higher education. This is the
situation which pertained in respect of living costs
before 1990, and which the current student loans scheme
was designed, in part, to redress.
20.81 On balance we believe that the weight of the arguments is in favour of not means testing access to loans. We are particularly concerned that it would have a significant impact on the participation rate. However, we recognise that means testing would release substantial additional funds in both the short and the long term, and that it is an option which the Government may have to consider if it cannot solve the short term funding problems in any other way. The decision on its acceptability to society is essentially a political one.
20.82 Table 20.9 shows the effect of the means testing options on public expenditure.
Both these options come closer to delivering the sort of
resources required by higher education. But they do so at
the expense of sharply increasing the contribution which
parents have to make. For the long term, we believe it
would be more equitable for taxpayers in general, rather
than the parents of students, to meet some of the cost of
an expansion of higher education.
20.85 Alternatively, the introduction of a modest real rate of interest should have the effect of encouraging advance payment and reducing loan take up rates. Table 20.10 shows what resources Option B, the tuition contribution option, would realise if a 2.5 per cent real rate of interest led to a modest reduction in loan take up rates. We discuss rates further in Chapter 21.
20.86 Given the need to release substantial resources in the short term, as described in Chapter 17, we believe that the Government should structure any new arrangements for contributions to tuition costs so as to maximise the proportion of students who pay in advance rather than taking up a loan. Means testing the access to the loan or introducing a real interest rate would increase this proportion without additional incentives being offered. If neither of these options is pursued, we believe that there is a strong case for the introduction of a discount along the lines of the Australian model. Further detailed work would be necessary to determine the appropriate level of discount and ensure that the arrangements provided value for money over the longer term, as well as releasing additional funds in the short term.
Technical features of loans
in relation to the Public Sector Borrowing Requirement
20.88 The introduction of resource based budgeting for public finances in 2001-02 should help to clarify the fact that loans are not equivalent to grants. Under resource accounting only the implied subsidies in the loans advanced are taken into the accounts. As shown by some of the options exemplified earlier, these implied subsidies can be large and can make some options which are apparently attractive look much less satisfactory over the long term. We believe resource accounting offers a better approach to understanding the true financial implications of loans schemes. Even with resource accounting, however, if the Government continues to treat loan advances in the same way as other current expenditure in the definition of the PSBR, there will still be a problem.
20.89 We have noted that the UK adopts a broader definition of PSBR than a number of other countries and a broader one than it is required to adopt under the Maastricht criteria. When we visited the Netherlands, for example, we learnt that student loans there do not count against the PSBR. We are very concerned that the constraints of the definition of the PSBR may force the adoption of solutions which ease short term problems, but which are poor value for money for the nation over the long term. We are even more concerned that the value being lost would come out of the contributions we feel it necessary to seek from graduates in work.
20.90 We recognise that this review will need to take place against the background of the wider economic context, but we see no merit in the present practice of treating loans in the same way as grants. It misleads rather than informs.
Securing private finance for
The previous Governments experience with the
twin-track scheme, which would have involved
both the Student Loans Company and the banks lending to
students, demonstrated how hard it is to involve the
private sector in heavily regulated and subsidised
lending schemes at a price which offers any advantage to
the taxpayer. We spent some time investigating whether we
could design a loans scheme which was more like a
commercial scheme and, therefore, more likely to be
attractive to private sector lenders. In doing so, we
still held to the principle that there should
be income contingent repayment arrangements. We
found that moving to a rate of interest which is close to
a commercial rate of interest (the current scheme has an
interest rate equivalent only to the Retail Prices Index)
created certain problems. The protection of income
contingent arrangements for the low paid means that a
significant minority of graduates would be making
repayments which did not even cover the interest on their
loan, let alone repay the debt. Their debts would,
therefore, continue to grow through life becoming, in
some cases, very large before write-off. Even though
individuals would be protected from unreasonable
debt-servicing burdens, we felt that the possibility of
an ever-rising debt would be a deterrent to participation
in higher education. Although the same difficulty can
arise with any real rate of interest, it is severe
with commercial interest rates. We were told that the
Australians had considered real interest rates for their
Higher Education Contributions scheme, but had rejected
them for the same reasons.
20.93 We also considered whether a mutual scheme might help to make a contributions scheme more attractive as a commercial proposition. Under a mutual scheme, all those taking out loans would be liable to pay not only the sum borrowed, but the sum borrowed plus a premium of perhaps 20 per cent to cover the payment of the commitments of those who will never earn enough to pay their commitments. It would seek to deal with two of the main problems with loan schemes:
20.94 This approach also increases the amount paid by those graduates on higher incomes; and may thereby provide an incentive for individuals who are confident about their future earning potential to pay up front. While this might be desirable in terms of short term increases in funding, it risks undermining the basis of the loan scheme by negative selection. Only those with the poorest prospects would take out the loan, which would increase the size of the mutual premium required to cover non-repayment. This would encourage even more of those with better prospects to opt out, leading to a scheme which was unstable. To avoid this, it would be possible to require all students, whether they took out a loan or not, to make a 20 per cent contribution to the loan fund. That would, however, be simply equivalent to requiring a higher contribution from all.
20.95 Although we find the concept of the mutual scheme attractive, we have concluded that it is unlikely to provide a funding approach that is stable in the long term. In the light of these considerations, we have concluded that the twin-track approach has fundamental difficulties that cannot be readily overcome.
20.96 Another way of securing private capital to finance loans would involve selling the rights to repayments of the government-provided loans. It is difficult to see what intrinsic merits such an approach might have, other than achieving short term PSBR savings. In the long term this approach would cost more. This is mainly because the student loan debt is a novel financial asset, which potential purchasers would be likely to discount heavily until a clear track record is available. It also reflects the fact that the Government itself can always borrow money more cheaply than commercial institutions, and that the purchasers would be looking to make a profit. At the time of writing we do not know whether the present Government intends to proceed with the debt sales planned by the previous Government. In Chapter 21 we recommend using the Inland Revenue system to collect graduate contributions. We have been advised that the Office of National Statistics, which is responsible for interpreting international classifications of the PSBR, is likely to take the view that sales of loans whose repayments are collected via the tax system would not be classified as private sector activity. Such loans would stay on the governments balance sheet, thus defeating the very purpose of the sales.
For the purposes of exemplifying options, we have assumed
generally that student loan debt will not be sold. We
recognise, however, that if changes in accounting
practice are not feasible, debt sales may be a necessary,
if undesirable, short term feature. We would, however,
make two comments:
20.99 We recognise that a requirement on the over 50s to pay a contribution to tuition costs without access to a loan facility would make participation in higher education difficult for some students in this age group. But, on the other hand, older students would have an unfair advantage over their younger colleagues if they were given loans which, for the most part, they were not required to repay. We do believe, however, that such students should be entitled to the fee remission arrangements we have recommended earlier in this chapter.
Students on longer courses
20.101 In a limited number of cases study over a period of four years or more is essential in order to gain entry to certain occupations, and it is right that students should not be discouraged from embarking on the necessary course of study or prevented from completing it because of financial considerations. On the other hand, we believe it is important (for the reasons set out in Chapter 19) that any drift towards an increase in the average length of course should be discouraged. There are also many cases where a students choice to undertake, say, a fourth year of undergraduate study is based on a sound expectation that this will increase his or her later earnings potential. For these reasons we believe, on balance, that it would not be right to put in place any across the board measures to limit the contribution required from students on longer courses.
20.102 So long as income contingent payment arrangements along the lines which we have recommended earlier in this chapter are adopted, we believe that students will, on the whole, be willing to make a somewhat larger investment where that is necessary to achieve a particular goal (such as entry to their chosen profession). Where the purpose of the additional years of study is less clear, it is right that students should be encouraged to question whether they provide value for money. Having said that, we believe that there is scope for providing additional targeted support to ensure that there is no adverse impact on recruitment to occupations requiring a longer than average period of study. We believe the best approach would be for the appropriate professional bodies and, in the case of relevant public service professions, like teaching and medicine, the Government to establish bursary or similar incentive schemes for students wishing to study for occupations requiring four years or more of study.
Our Scottish Committee, while supporting our preference
for Option B, the tuition contribution option, is
concerned about its impact on Scottish students, many of
whom will choose to undertake a four year Honours degree.
They have suggested that the Secretary of State for
Scotland should consider the implications of the proposed
arrangements for equity for students studying for
comparable degrees across the UK.
The living away from home
20.105 However, there are still large areas of the UK where there is no higher education provider within daily travelling distance, or where the available provision is insufficient or inappropriate in nature. This is a particular problem in relation to Northern Ireland where some 40 per cent of young people are obliged to travel outside the Province to study and is shared by a number of other parts of the UK, including Cornwall, Cumbria and parts of East Anglia. Moreover, the diversity of the system which we would wish to encourage means that even where there is an institution within travelling distance it may not provide the particular programme which the student wishes to study. To remove the living away from home allowance for such students would seem harsh, and would have some adverse effect on participation in such areas. It could also have severe consequences for certain campus-based institutions and specialist institutions which rely on a national intake.
20.106 For these reasons we do not recommend any changes on this front in the short term. However, we believe that the Government should keep this issue under review with a view, once the pattern of provision is more evenly spread, to providing only loan rather than grant support to students wishing to study away from home.
Students from elsewhere in
the European Union