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 such a commitment scheme;
  • the administrative arrangements required;
  • potential longer term developments.

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:

  • students make a contribution to the cost of their courses which, until the recent changes, amounted to about 23 per cent of the average cost of tuition. Contributions are paid into an independent trust fund and the proceeds are channelled into higher education;
  • students have the choice of paying in advance, in which case a discount of 25 per cent is offered, or of deferring payment by taking out a loan;
  • where payment is deferred, graduates begin repaying their loans once their income reaches a set threshold. Until the recent changes, this threshold was the average taxable income of Australians in paid work;
  • once over the threshold, graduates pay a fixed percentage of their income. Until 1996, the percentage payment rate began at three per cent for those just over the threshold, rising to a maximum of five per cent for those on higher incomes. These payment rates have been significantly increased as a result of the recent changes to the scheme;
  • loans are indexed to inflation, but do not attract a real interest rate;
  • payments are collected through the tax system.

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.

Amount of 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.

Contribution threshold
21.8 The key question is the income level at which graduates should begin contributing. As graduates are being asked to contribute on the grounds that they receive a personal benefit from higher education in the form of increased earnings, it can be argued that they should not be asked to contribute unless and until that benefit has been received – for example, when their earnings exceed the national average (as in Australia). This, however, ignores the fact that an individual may already be benefiting from higher education at a lower earnings level, for example through being in work rather than unemployed. Higher threshold levels have a substantial impact on the flow of additional resources for higher education. Even the current UK student loan repayment threshold of 85 per cent of national average earnings has a material effect on the income stream, with a high proportion of graduates allowed to defer their repayments. At the end of the financial year 1996-97 almost half of all borrowers from the Student Loans Company (SLC) who would otherwise be due to repay were deferring their repayments.

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
21.12 There are three related issues to be resolved in determining the percentage rates at which graduates should make their contribution:

  • whether all graduates should pay the same percentage contribution rate once their income exceeds the threshold, or whether the percentage rate should increase for those on higher incomes;
  • whether contributions should be at a flat rate (applying to all income) or a marginal rate (applying to income above a threshold, as with income tax);
  • the actual levels at which the rates should be set;
  • whether there is a ceiling fixed to contributions from those on high incomes.

21.13 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 cancelled.

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 graduate’s 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 graduate’s 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.



21.16 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 full.

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.

 

Interest rates
21.18 The largest element of subsidy in the current student loans scheme is the interest rate subsidy (ie the difference between the Retail Prices Index-linked rate of interest charged to students, and the cost to the Government of borrowing the funds). Some of those who submitted evidence to us argued that this ‘hidden’ subsidy should be reduced, or even removed entirely, and the funds released used to provide more targeted support.

21.19 There are a number of arguments for this approach:

  • it would produce a material increase in revenue from loan contributions over the medium to long term. However, this would be limited by the introduction of an income contingent contributions regime. This is because the contributions which individuals make under an income contingent scheme are determined by their income, rather than the interest rate: for those on low incomes, the effect of an increase in the interest rate is to substitute contributions to interest for the contribution to repayment of principal, so ultimately a larger proportion of principal is written off on cancellation;
  • if the interest rate was set at a level which met the Government’s cost of borrowing, there would be no ongoing subsidy paid by the Government, other than the eventual cost of default or cancellation. It would, therefore, matter less if contributions were spread over a longer period than now;
  • if access to the scheme is not means tested, and the interest rate is heavily subsidised, there is a real risk that students who do not need the facility will make use of it anyway and reinvest the money to secure a net financial gain. Real interest rates would reduce the subsidy and this risk (thus also reducing costs).

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.

Cancellation
21.23 Under the current student loans scheme, liability to repay is cancelled after 25 years or when the graduate reaches the age of 50, whichever is the sooner.4

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 graduate’s 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.

Administrative arrangements

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:

  • assessing students’ eligibility for public support;
  • means testing and paying grants for student living costs;
  • payment of any public money for tuition which follows the student;
  • advancing (and if necessary means testing) loans for student living costs;
  • advancing loans for tuition contributions;
  • collection of loan repayments (or graduate contributions) for both living costs and tuition.

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).

Assessing student eligibility and paying maintenance grants
21.28 At present there are two main aspects of assessing students’ eligibility for public support. The first centres on whether they are personally eligible, for example, whether they meet the residence requirements or have previously had a mandatory award. The second centres on whether they are enrolled on an eligible programme. This task is largely carried out by local education authorities (LEAs), the Student Awards Agency for Scotland (SAAS) and the Education and Library Boards in Northern Ireland, with the help of institutions. The Student Loans Company (SLC) relies on such assessments to determine loan eligibility in most cases, but has to undertake further work with institutions in some cases because the eligibility criteria for grants and for loans are not identical. It would be simpler for students if they had to interact with only one body.

Public money which follows the student
21.29 LEAs and the central awards agencies also pay a per capita mandatory award fee, which is not means tested, to institutions on behalf of all qualified individuals. This is the current element of public funding which follows the student.

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.

21.33 Such a development will require careful preparation if it is to deliver the kind of benefits we expect.

Making loans for student living costs
21.34 Despite some continuing concerns in the evidence submitted to us about the effectiveness of the SLC, we believe that these concerns stemmed from certain administrative and management problems in the SLC’s early days. Evidence from the SLC’s own surveys of customer satisfaction indicates a very favourable opinion of its processes, although those in repayment or deferment have slightly less positive views than current borrowers.5

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 Company’s progress in refining its administrative systems, it should form the nucleus of any future student support agency.

Advancing loans for tuition
21.36 A number of the options we identified in Chapter 20 would involve either a flat rate contribution to tuition costs backed by loans, or a means-tested individual contribution. We suggested that a flat rate contributions scheme should exist for individuals who wished to pay at the time of study, perhaps with the incentive of a discount for doing so.

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.

Collecting contributions from graduates in work
21.40 Our view that contributions should be made on an income contingent basis makes the collection of payments more complicated than under the current loan system. At present, once a graduate’s income exceeds the deferment threshold the annual rate of payment is one-fifth (or one-seventh) of the loan debt, irrespective of income. The payments are made by direct debit signed at the time the loan was taken out. We have suggested that in future, contributions are made on marginal income above the threshold (see paragraph 21.14).

21.41 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:
  • income contingent contributions;
  • charging real interest rates when graduates start to contribute;
  • the sale of the loan book to the private sector through securitisation.7

21.42 The principal benefits claimed for the use of the NICs are:

  • more efficient administration by ‘piggy backing’ on an existing collection mechanism;
  • a lower default rate than achieved by collection through the Student Loans Company (SLC);
  • the lower and upper income thresholds used by the National Insurance system would ensure some small contributions, from those on low incomes and cap the annual contribution required from high earners.

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:

a using the Inland Revenue to collect contributions;
b using the SLC to collect repayments, with information on individuals’ income verified by the Inland Revenue;
c using the SLC alone.

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 individual’s wages/salary could be implemented in broadly two ways:

  • either by providing employers with separate deduction tables, to allow them to calculate the relevant amount to deduct in each pay period;
  • or by adjusting an individual’s tax code to collect a particular amount during the course of a tax year.

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 individual’s 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 student’s 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.

21.48 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:
  • a compliance burden on employers;
  • amendments to the Inland Revenue’s computer systems;
  • removing student loans from the purview of the Consumer Credit Act;8
  • resolving the issue of employer default and liability.9

21.49 In our view, the balance of advantage lies strongly with using the Inland Revenue as the collection mechanism.

Recommendation 82
We recommend to the Government that the Inland Revenue should be used as the principal route for the collection of income contingent contributions from graduates in work, on behalf of the Student Loans Company.

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:

  • the establishment of a single Student Support Agency;
  • the establishment of a series of individual learning accounts (ILAs) perhaps within the context of a Learning Bank.

A single Student Support Agency
21.52 As we noted both in Chapter 19 and paragraphs 21.25 to 21.31, we are concerned about the implications of having up to 160 separate LEAs in England and Wales involved in the administration and payment of student maintenance grants and the payment of the per capita mandatory award fee to higher education institutions. The difficulty is particularly acute because institutions have to invoice separately each LEA from which they have students and other awards agencies for Scotland and Northern Ireland. The separation of the arrangements for grants and loans, and their different requirements, make it difficult for students to relate effectively to the different processes. There would be merit in bringing these functions together, to provide students with a single point of access to a comprehensive service.

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:

  • a one-stop-shop for students for the administration of funds in support of their living costs and tuition;
  • proper records of how much public support individuals receive over time for higher education study;
  • a single point of contact for institutions in receipt of individual contributions and the per capita element of public funding based on student choice.

21.55 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.

Recommendation 83
We recommend to the Government that it establishes, as soon as possible, a unified Student Support Agency with responsibility for:

  • assessing the eligibility of individuals for various kinds of public support;
  • administering graduate contributions on an income contingent basis;
  • means testing and paying grants for students’ living costs;
  • making per capita tuition payments to institutions according to the number of students they enrol.

Individual Learning Accounts and a Learning Bank
21.57 We were invited by the Labour Party at the time of our establishment to explore the possibility of using a system of Individual Learning Accounts (ILAs) or a Learning Bank as a means of channelling funds (both public and private) into higher education. The proposal was first raised in the Report of the Commission on Social Justice.10 Our thinking on this idea was informed by a report which we commissioned (Report 13: ‘Individual learning accounts and a learning bank’) and by other recent work on the use of individual learning accounts to support training and development opportunities for those in work.11, 12

21.58 Paragraph 18 of Report 13 defines an ILA as:

  • an accumulation fund: providing opportunities for investment by allowing individuals, their families, the state and/or employers to deposit cash sums into the ILA with a view to accumulating funds for the purchase of lifelong learning and to meet the repayment of outstanding loans and overdrafts;
  • a distribution fund: providing a facility for individual discretionary control of funds by permitting individual access to, and control over, the distribution funds with the account, circumscribed by the purchase limitations and other rules governing the account;
  • a loan/overdraft facility: allowing individuals access to loans from public or private sources with which to meet the costs of tuition fees and/or personal maintenance when purchasing a course or learning opportunities;
  • a repayment mechanism: providing for secure and equitable repayments of loans, debts, overdrafts and so forth.

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.

Increasing individual contributions
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:

  • a savings scheme with tax relief, as now available for pension plans, such as a modified Personal Equity Plan (PEP) or a Tax Exempt Special Savings Account (TESSA);
  • a long term savings bond, with the incentive of a Government contribution when the bond is cashed in, provided it is used to support learning.

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.

Employer contributions
21.62 The other key difference between an Individual Learning Account (ILA) model and the single Student Support Agency is the possible role of employer contributions. While some employers do provide significant support for full-time undergraduates through sponsorship arrangements and industrial placements, these are very different from the kind of support they provide to their employees for training and 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
21.64 One potentially important feature of ILAs is that they provide individuals with real discretion over resources distribution. We have noted, both in Chapter 19 and in this chapter, that it would be desirable for a greater element of institutional funding to be linked to student choice. There would be no real advantage in using ILAs, rather than other arrangements, if individuals continued to behave as they do now, taking a continuous course at a single institution. If, as we believe, it will become more common for individuals to re-order their attendance to meet domestic or employment circumstances, student choice could have an increasingly marked impact on institutional behaviour, and ILAs could support this.

A Learning Bank
21.65 A Learning Bank is essentially a collection of ILAs or other types of learning account. It could, in principle, administer all the functions identified above for ILAs. However, we have concluded that a good deal more work is required to define the exact nature and purposes of ILAs, and to sell the concept to individuals, employers and others, before the precise administrative framework can be determined. Moreover, we are of the view that, within the context of higher education, the Learning Bank and the single Student Support Agency are essentially different approaches to the same end.

Conclusion

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.