21.1 The previous chapter concluded that graduates will have to contribute more to the cost of their higher education, and makes various recommendations about how they should be encouraged to do so. In the short term at least, an option based on commitments repaid on an income contingent basis by graduates once they are in work should be adopted.
21.2 In this chapter we consider:
The nature of the commitment scheme
21.3 We are convinced that an increased contribution from graduates can be sought only if payment is income contingent.
21.4 An income contingent graduate contribution scheme (the Higher Education Contribution Scheme, or HECS) has existed for some years in Australia, enabling graduates to contribute to the cost of their higher education. It has attracted international attention, primarily because it has produced significant additional revenue for the higher education system while not deterring access for those from lower socio-economic backgrounds or minority groups.1 Recent changes to the scheme announced by the Australian government to increase the repayment levels for graduates have been controversial, but previously the scheme had been largely accepted by the student population as equitable.
21.5 As our aim was also a scheme which produces additional resources for higher education and ensures that access does not suffer, we looked carefully at the Australian model in its original form. The relevant features of the scheme are as follows:
21.6 In terms of social attitudes, or the amount of additional resource which is needed for higher education, the circumstances of the United Kingdom (UK) in 1997 may not be the same as those of Australia in 1988. Nevertheless, we believe that many features of the Australian scheme, in its original form, would translate well to the UK.
contribution and discounts for advance payment
21.7 We have already stated in Chapter 20 that in a scheme involving contributions to tuition costs, a contribution of about 25 per cent of teaching costs would be appropriate. This is broadly in line with the Australian scheme. It also corresponds with the contribution normally made by students aged over 18 in further education in England. We have also suggested in Chapter 20 that the Government should consider the case for offering a discount for advance payment of the contribution.
21.9 Some of those who submitted evidence argued strongly that the contribution threshold should be set significantly lower than at present.2 They noted that if there is a high threshold, those who are above it have to pay a relatively high proportion of their income to produce a reasonable income stream for higher education. If the threshold is set at a lower level, the burden of contribution is spread across a larger number of graduates, but it is still possible to collect more from the higher earners and ensure that contribution levels are manageable for all. Commercial experience suggests that getting borrowers into the habit of making small regular payments is an effective way of reducing the number of defaulters.
21.10 It has been suggested that the appropriate contribution threshold would be the level of earnings at which national insurance becomes payable, currently £61 per week, or £3,172 per year.3 We are convinced that this would be too low. The result would be either to push many graduates at this income level into reliance on benefits (if contributions were taken into account in assessing benefit eligibility) or to disadvantage this group when compared to others at a similar income level. The contributions obtained from graduates on incomes this low would, in any case, be insignificant.
21.11 We have concluded that the threshold for contributions should be set lower than under the current loans scheme, but significantly higher than the threshold for national insurance payments. The decision about thresholds needs to be taken alongside a decision about rates of contribution discussed below and about whether there should be a cap on the level of contributions from high earners. Two options are exemplified: one under which the threshold is set at 100 per cent of average graduate starting salaries (some £10,500 in 1995-96 prices), and one in which it is set at £5,000 in 1995-96 prices but with a low rate of contribution.
Rates of contribution
On the first of these, we believe there is a case for
contribution rates to be fixed on a progressive basis as
in Australia, so that those on higher incomes pay a
higher percentage of their income. This is both
equitable, in that the largest monthly contributions come
from those who can most afford them, and will maximise
the resources released for higher education. In most
cases it will affect only the speed at which graduates
make their contribution, rather than the total size of
it. However, allowing those on low incomes to pay more
slowly will mean that some of this group will not pay
their full contribution by the time their commitment is
21.14 One way of maximising the extent to which contributions rise with income would be for contribution rates to apply to marginal rather than total income, in the same way as income tax (though not necessarily using the same thresholds). This means that no payment is required on any income below the threshold, even when total income exceeds the threshold. The percentage payment rate is charged only on that part of a graduates income which exceeds the threshold. So if a marginal repayment rate of 10 per cent is charged on income over £10,000, a graduate earning £11,000 would pay £100 (10 per cent of £1,000) rather than £1,100 (10 per cent of £11,000). This avoids the cliff edge problem which arises when a contribution based on total income is triggered once a graduate reaches the threshold.
21.15 The most appropriate thresholds and contribution rates will need to be determined by taking into account both what is manageable for graduates and the income stream needed for higher education. For exemplification, we have modelled two schemes. In the first, graduates pay 12.5 per cent of marginal income above a threshold of the average graduate starting salary (£10,500 pa in 1995-96 prices). In the second, graduates pay five per cent of marginal income above £5000, and 10 per cent above £10,000. Contributions would not vary with the size of a graduates commitment. Table 21.1 shows the impact of each of these on graduates. It also shows the payment burden a graduate with a £9,000 loan would have under the current loan scheme if its terms were unchanged. The advantages of the income contingent arrangements are clear: they produce a progressive contribution regime, and modest average contribution rates, payable until a graduate has fulfilled his or her commitment.
Contributions of the level indicated for those on the
highest incomes suggest that it may be necessary to cash
limit their annual level, for example at £2,000 a year,
or seven per cent of total income. It will be necessary
to consider this issue in the light of the particular
scheme selected. Similarly, provision should also be
available for graduates wishing to make early payments in
21.17 Table 21.2 shows, however, how much impact a higher threshold has on the resources released for higher education. The higher threshold, even in combination with a higher marginal rate, does not yield as high an income stream as the lower thresholds option. Because of this, we have used the lower thresholds in exemplifying our main funding options.
21.19 There are a number of arguments for this approach:
21.20 Real interest rates can, however, have the effect of increasing the burden for those on lower incomes. To avoid that, it would be possible to prevent the level of graduates outstanding obligations increasing in real terms, while their incomes were too low for them to make contributions, by charging a zero real interest rate during those periods. Those on low incomes would also be protected because, although the size of their outstanding loans might rise over their working lives, their monthly contributions would be capped, and the outstanding debt would ultimately be cancelled (see paragraphs 21.23 and 21.24).
21.21 Those on low incomes who paid in full, however, would pay more in total than those on high incomes who paid their total contribution quickly. With a zero real interest rate, by contrast, the highest subsidies go to those on the lowest incomes. The existence of a real rate might be a disincentive to participation by students worried about escalation of debt after graduation.
21.22 Clearly there is a balance of considerations. The differences in income to the Government, and in charges to graduates, from rates of interest of 2.5 and 5 per cent amount to some £100 million a year initially, rising to £200 £300 million a year in 20 years time. Providing contributions are income contingent, and that rates of interest are limited to 2.5 per cent (ie the rate of inflation) during the years of studentship or during periods of sickness or unemployment, the burden for graduates in work need not be heavy. But that has to be balanced against the potential risk of discouraging participation in higher education. This risk led us to the view that any rate of interest should be linked to the rate of inflation.
21.24 The purpose of an income contingent scheme is to spread contributions over whatever period is necessary to ensure that they remain manageable, whatever the graduates income. On that basis, it is reasonable to contemplate contributions for graduates on low incomes, or who take time out from the labour force, continuing over the whole of their working lives. We suggest therefore that liability to repay should be cancelled at the common retirement age of 65. As under the current arrangements, cancellation should be permitted only where the graduate has not defaulted on payments which were due to be paid earlier.
21.25 Current arrangements for administering student support for living costs and tuition are complex, and involve a large number of agencies. In part, this reflects the number of distinct activities involved, but it also reflects the historical accidents of the way the system has developed.
21.26 There are at least six distinct procedures that will need to be carried out, if our recommendations are accepted. These are:
21.27 Current arrangements can be confusing to students who have to make applications to a local education authority (or a central body in Scotland or an Education and Library Board in Northern Ireland) for a mandatory award, to the Student Loans Company (SLC) for a loan, and to the institution which confirms their enrolment on an eligible programme and thus their eligibility for a loan. Institutions have to interact with over a hundred local authorities, the central awards agencies and the SLC. As new funding arrangements are introduced, it should be an objective to simplify the procedures for both students and institutions. In paragraphs 21.51 to 21.65, we examine some options to achieve this objective, including individual learning accounts (ILAs).
eligibility and paying maintenance grants
Public money which follows
21.30 Among those who commented to us on the administration of mandatory award payments, many were of the view that it is inefficient for LEAs to be involved in the payment of fees or grants. We were concerned, in addition, about the impact on cost-effectiveness of the establishment of even more, and smaller LEAs as a result of local government reorganisation. This involves duplication of functions and still more authorities for each institution to invoice for fee payments.
21.31 We have noted with interest the central administration of mandatory awards in Scotland and the administration of public loans for all UK students by the SLC. We believe, on the basis of this experience, that it would be sensible to bring these functions within a single administration. We consider this further at paragraphs 21.51 to 21.56.
21.32 We proposed in Chapter 19 that there should continue to be an element of public funding, separate from the Funding Bodies responsibilities, which flows with student choice, that this should cover part-time and postgraduate students, and that it should be a function of a Student Support Agency.
Such a development will require careful preparation if it
is to deliver the kind of benefits we expect.
Making loans for student living costs
21.35 As long as student loans remain in the public sector and universally available, it makes good sense to have a single administration of those loans. Furthermore, in the light of the Student Loans Companys progress in refining its administrative systems, it should form the nucleus of any future student support agency.
Advancing loans for tuition
21.37 We envisage that, for all options involving a contribution, whether backed by a loan or not, payment of the contribution would be a condition of admission to the programme of study. For those individuals paying at the time of study, there would be a direct financial transaction with the institution.
21.38 If individuals needed to take out a loan to cover their contribution it would be sensible, if our earlier conclusion about the improved effectiveness of the SLC is accepted, for loans for tuition to be made by the SLC as well. However, loans for the tuition contribution would be different in kind from living costs loans. They would be for a specific purpose, rather than the more general purposes of supporting students living expenses. It would be essential, therefore, to have in place arrangements to ensure the funds are used for the intended purpose but leave the authority to make payments with individual students. The best available model for this is the process of transfer of funds for house purchase backed by a mortgage. The individual controls the transfer of the funds through his or her signature, but does not physically have access to the funds. The SLC would pay the funds to an institution on the signature of the individual, who would at the same time make a contractual commitment to contribute once earning enough to do so.
21.39 Although loans for living costs and a loan to support a contribution to tuition costs are different in kind, the application process ought to be combined to ensure simplicity for students and to avoid administrative duplication.
from graduates in work
If future contributions are to be genuinely income
contingent, a new system will be needed. A number of
those submitting evidence to us, drawing on the work of
Dr Barr and Mr Crawford at the London School of Economics
and Political Science, suggested that the National
Insurance Contributions Scheme (NICs) offers an existing
mechanism which could be readily adapted to collect
student loan repayments.6
The proposals put to us by Barr and Crawford were
part of a package which included not only the collection
of contributions via NICs, but also:
21.42 The principal benefits claimed for the use of the NICs are:
21.43 We have already explained in paragraph 21.10 why we think the National Insurance (NI) lower threshold is too low for graduate contributions. Using the NI system would also introduce an unnecessary layer of administrative activity. Currently the Inland Revenue collects tax and NI contributions together from employers and then passes the NI contributions to the Contributions Agency. There would be no advantage in the Inland Revenue passing graduate contributions through the Contributions Agency en route to the SLC. We have therefore examined three alternatives:
It is important to appreciate that using the Inland Revenue to collect graduate contributions is not the same as introducing a graduate tax. Under all the options, the SLC would continue to make the loans and be accountable for contributions.
21.44 Under Option a, the SLC would supply the Inland Revenue with the name and NI number of all individuals who had taken out income contingent loans. As the graduate contributions would not be tax, special arrangements would be necessary to ensure the appropriate level of additional deductions from earnings by employers for graduates in paid employment. As with tax, alternative arrangements would be necessary for the self-employed.
21.45 We have been advised by the Inland Revenue that a requirement on employers to deduct graduate contributions from an individuals wages/salary could be implemented in broadly two ways:
21.46 For self-employed graduates, repayments would form part of the self-assessed return, and would be collected with income tax.
21.47 The other two Options (b and c) would both involve the Student Loans Company (SLC) in collecting income contingent contributions direct from individuals. This would add considerably to the administrative burden on the SLC, in that it would need to establish, in advance, the projected income of every individual, not just those seeking deferment, and would have to send out revised contribution schedules. In addition, it would need to review every individuals actual income each year. The principal difference between Options b and c is that under Option b the Inland Revenue would provide details of the students income for the year, either on a sample basis or more widely. For individuals not making tax returns, this might require the Revenue to contact individuals direct or to bring them into self-assessment.
The main advantage in using the Inland Revenue is that it
already has in place mechanisms for assessing income and
securing payments from virtually all members of the
working population. It would be burdensome for
individuals, and administratively inefficient, to have
those arrangements duplicated by the SLC. A system which
is simple and efficient is far more likely to be
acceptable to graduates and to reduce the risk of
defaults. There would, however, be costs involved in
using the Inland Revenue including:
21.49 In our view, the balance of advantage lies strongly with using the Inland Revenue as the collection mechanism.
21.50 There will inevitably be some individuals outside the tax system, particularly those working abroad. The SLC will need to continue to be responsible for securing contributions from such individuals.
Longer term arrangements
21.51 Only full-time undergraduate students are covered by the existing arrangements for student living costs and tuition support, ie fees, paid by local authorities. Over time, if individuals are to move in and out of the system more often, and perhaps to mix periods of full-time study with part-time study or to move at different rates through the levels of the qualifications framework, there is a strong case for rationalising and simplifying the administrative arrangements for supporting students and graduates. We have examined two types of approach:
A single Student Support
21.53 On the basis of the experience of the Student Loans Company (SLC) and the Student Awards Agency for Scotland (SAAS) we have concluded that a single Student Support Agency would be both desirable and feasible. Such an agency could absorb the current functions of LEAs in England and Wales in relation to assessing eligibility, means testing and payment of grant, and the per capita element of public funding to institutions which follows student choice. It could also absorb the functions of the SLC.
21.54 Although ultimately the number of individuals on the books and the number of transactions handled by a single Student Support Agency would be very large, it would provide:
The main challenge for such an agency would be to improve
on the standards of service currently provided to
students and institutions by the best of the local
education authorities and the existing SLC. There would
be a particular need to avoid becoming too distant. One
possible approach would be to have branch offices on
university campuses or in metropolitan centres, although
new technology and changing customer expectations might
allow the agency to rely largely on telephone and
electronic communications rather than face to face
contact. The Agency would also need to work with
Government to develop appropriate means of tracking the
movement of students in and out of higher education, and
developing an understanding of patterns of study, in a
lifelong learning system.
21.56 One approach, which appears to us promising, would be to build on the SLC. We believe, however, that such a development needs to be planned and implemented in a staged way, to enable new systems to be developed and tested. The priority should be to implement new arrangements for income contingent graduate contributions. The transfer of functions from LEAs to the new Student Support Agency should take place once new arrangements for graduate contributions are effectively implemented.
Individual Learning Accounts
and a Learning Bank
As the report notes, each of these elements, taken separately, could probably be secured through existing arrangements but, taken together, they promise a unique solution. The three latter functions line up closely with the functions which we have identified for the single Student Support Agency. It is of interest that others have emphasised the importance of individual control on the withdrawal of funds to support learning, as an essential feature of a system of individual contributions. Our thinking is consistent with this.
21.59 The first function of Individual Learning Accounts (ILAs), that of providing an accumulation fund, is different in kind from the other three. We see it as desirable to build on the individual propensity to save for lifetime events, for example through pension or private school fees plans, to encourage family, individual and intergenerational savings towards the costs of higher education. A good deal of such support is currently provided informally. Gifts to, and savings withdrawn by, full-time undergraduates nearly doubled from £392 in 1988-89 (the year before the introduction of the Student Loans Scheme) to £782 in 1995-96.13
21.60 We examined two approaches to incentivising savings for higher education:
21.61 On balance, we are inclined to support the conclusion of Report 13 that using ILAs to incentivise savings is unlikely of itself to bring significant additional finance into higher education. Moreover, unlike savings for other purposes, savings for higher education carry a risk that the individual will not qualify to participate. Nevertheless, we believe that the prospect that individuals will have to make a higher contribution, and the increased expectation of several mid-career changes requiring training, will lead individuals and their families to seek tax efficient ways of saving to support career development.
21.63 The possible contribution by employers to Individual Learning Accounts (ILAs) is part of a much wider group of issues about the burden on employers of employment and training policies.14, 15 Compulsory contributions by employers to ILAs or training levies would simply add to employment costs. It is questionable, however, whether individuals as employees would have an incentive to make contributions into ILAs for their future training needs, if they could not be sure that employer and/or state contributions would be forthcoming. Nevertheless, we are convinced that ILAs have the potential to provide a more assured basis for individuals and their employers to fund continuing professional development both within higher education and elsewhere.
ILAs and student choice
A Learning Bank
21.66 Much of the discussion in this chapter has focused on administrative matters and the way in which arrangements can be responsive to individual needs. It is clear that, whatever approach is taken, the state has a major continuing role, both through its contribution to the funding of higher education, and through the framework it sets for the interactions between institutions and individuals. In the next chapter, we explore the nature of the continuing relationship between government and higher education.