§ 3.12 p.m.
§ The Minister of State, Department for Education and Employment (Baroness Blackstone)
My Lords, I beg to move that this Bill be now read a second time.
I would like right at the outset to make it clear to noble Lords that this Bill has nothing to do with the Dearing Report or the Government's response to it. Our proposals for the future of student funding have been brought before the House in the Teaching and Higher Education Bill which we will be debating soon.
The Bill before us today relates solely to the existing student loan regime and the debt we intend to sell to the private sector. That was the policy of the previous 1251 Administration. The debt sale process was already under way when we came to power. Our manifesto gave a clear commitment to staying within the spending plans of the previous government for two years. It is to ensure that we stay within those spending plans that we are continuing with this policy.
The Bill also serves to emphasise our commitment to the development of a wide range of public private partnerships. The Government currently bear the credit risk of the student loan book. The debt sale involves the transfer of that risk to private-sector financial institutions which are experienced both in dealing with such risk and the management of loans generally.
The debt sale will also make the concept of publicly funded student loans more readily understood by the financial markets. The previous Administration's attempt to involve the private sector in student loans through the ill-fated twin-track approach foundered because many of the financial institutions which might have participated did not fully comprehend the nature of student loans. It is our hope that this Bill and the debt sale it facilitates will lead to a greater understanding within the financial community of the nature of the student support system.
The Bill does not just smooth the path of the sale for the Government and the successful bidder, it also amplifies existing measures to protect borrowers. The Bill provides a range of protective measures. These include the freezing of loan conditions within the borrower's loan agreement; the power to set collection standards by which the debt purchaser must abide; and the appointment of an independent assessor to investigate and report on disputes between borrowers and lenders. I will return to these in a little more detail later.
The Bill will also serve to support our wider plans for education, based on raising standards, extending access, and ensuring high quality provision.
The Bill before us today provides in Clause 1 for the transfer of loans to the private sector. It deals with the assignment of loans and allows my right honourable friend the Secretary of State to make arrangements in connection with such assignments. These include payment of subsidy to debt purchasers, administrative provision in respect of assigned loans and the power to repurchase loans or to direct a further reassignment of them to a third party.
Clause 2 provides for the key terms of a loan agreement not to be changed by further regulations after the agreement has been made. It freezes the time and manner of repayment of the loan, the means of calculating the annual rate of interest payable on loans and the borrower's rights to deferment and cancellation.
Clause 3 puts the arrangements for the administration of loans on a contractual basis, like any other commercial loan, and not subject to the operation of public law functions.
Clauses 4 to 7 and the schedule provide for consequential amendments, commencement and territorial extent.
1252 The Bill has three main provisions. Clause 1 allows the Government to pay subsidies. These are necessary because student loans are in many respects unique. The loan scheme is only seven years old. Such a short track record makes the assessment of the risks involved difficult for the institutions bidding in the sale.
These loans bear no real interest rate. They are tied to the rate of inflation so that borrowers ultimately only repay in real terms the same amount as they took out in loans. What is more, borrowers earning less than 85 per cent. of average income can defer payments year on year and in some cases will have them cancelled if they reach specified age levels. These are not commercial loan terms, and they cannot therefore be sold on that basis.
Without a subsidy we would be able to sell loans for only a small percentage of their face value. We have decided to sell them at par—their full face value—and to subsidise the purchaser for some of the risk that is outside their control. The subsidy will also help offset some administrative costs. We are running a strong competition which will ensure that we obtain the lowest possible subsidy package. The four short-listed bidders will make their final bids in January indicating the level of subsidy that they would require. At the end of the competition we shall accept the best bid made.
Clause 1 of the Bill also allows the Government to buy back loans that we want to cancel for social policy reasons. These occur rarely and typically involve cases where severe disability makes the possibility of repayment unrealistic in practice. We believe that it would be unreasonable to put the burden of such loans on to the private sector. As a matter of public policy, it is right that that power should be held by my right honourable friend the Secretary of State.
Lastly, Clause 1 provides for an independent complaints procedure. Under the existing arrangements, borrowers have the right to take complaints about the administration of their loans to an independent assessor. The assessor's rulings are binding. We have ensured that borrowers whose loans are sold will continue to have the benefit of that right.
Clause 2 provides for the freezing of the terms of the loans when sold. Of those, the most important are the time and manner in which repayments are made; the method used in calculating the annual interest rate; and the borrowers' rights to deferment and cancellation. Significant variation of those terms—for example, if repayment terms were shortened or the interest rate payable on the loans changed—could have a major adverse financial impact on borrowers and debt purchasers. Those are risks outside the bidders' control. They would either seek to price that risk of change into their final bids or, alternatively, expect some other form of full compensation. Whichever was the case, the cost to the Government would be significant.
To avoid that position, Clause 2 provides for loan agreements to set out in detail the core terms on time and manner of repayments, the specific method used in setting the annual interest rate and deferment and cancellation. At present we discuss those matters when we debate the relevant regulations each year. As soon 1253 as the Bill becomes law, and before the sale transaction is completed, we shall make new regulations which will freeze the core terms for all loans. Not only will this protect the position of the debt purchasers; it will also afford protection to borrowers. The terms will be frozen as they were at the time the loan was taken out. That is just one protection we are putting in place for existing borrowers.
Clause 3 puts loans on a purely contractual basis, like any other commercial loan would be. Buyers understand the working of contract law and relevant consumer legislation. The clause removes the operation of public law functions from both the Student Loans Company—the lender—and subsequently from the debt purchaser. Under the existing legislation these functions can neither be transferred from the SLC, nor can decisions be made by the loans buyer. That makes for complex, unwieldy and expensive administration which would be unattractive to prospective purchasers who would probably not contemplate taking on the loans on that basis.
The transfer of loans to the private sector means that the responsibility for loans administration will fall to the debt purchaser, as owner of the debt. But I can reassure noble Lords that the Bill does not reduce the rights of borrowers. On the contrary, borrowers' rights will be protected through the sale agreement which will require the purchaser to meet the same collection standards as the Student Loans Company, as a minimum. Failure to abide by them could lead to legal action against the purchaser. Variations to these standards by the purchaser will not be allowed without written approval from my right honourable friend the Secretary of State. Any proposed changes by the purchaser would have to comply with the safeguards contained elsewhere in this Bill, and in existing consumer protection legislation in the Consumer Credit, Data Protection and Malicious Communications Acts.
Borrowers have no cause to fear. The existing deferment terms and lender's ability to deal with borrowers in financial difficulty will remain in place. There should be no need for any borrowers to default on their loan, but if they do they should expect to have legal action taken against them under the new arrangements in the same way as it is taken now.
Noble Lords may be concerned that private sector debt purchasers might seek to use the database or loan borrowers for other purposes such as cross selling financial products. I can assure them that the Bill specifically prevents any such data being provided or used for such purposes. The sale of a borrower's loan will not result in a flood of junk mail.
In conclusion, this is a technical Bill designed purely to enable us to complete the planned sale of student loans over two years. These sales are necessary for us to meet the manifesto commitment of living within existing spending plans this year and next. It makes the loan book sufficiently attractive through a subsidy package to attract reputable financial institutions to buy the debt, whilst at the same time protecting the interests of borrowers. We have run a vigorous competition which is now reaching its closing stages. We will accept the most competitive bid.
1254 The Bill will help to support our plans for raising educational standards, extending access and high quality provision. I commend the Bill to the House.
§ Moved, That the Bill be now read a second time.—(Baroness Blackstone.)
§ 3.25 p.m.
§ Baroness Maddock
My Lords, like many who have gone before me in recent weeks I rise to address your Lordships for the first time and I do so with feelings which are a mixture of nervousness, excitement and awe.
In the short time that I have been here since I was introduced between my noble friends Lord Tope and Lady Hamwee, I have experienced nothing but kindness and warmth, not only from noble Lords but also from people who work in the House. I am glad to take the opportunity today to thank them all. In particular, I should like to thank those people who helped to make my introductory day here such a memorable and pleasant experience, not only for myself but also for my guests.
Before I took part in that ceremony I was asked by many people whether I was nervous. I said that, obviously, everybody wants things to go smoothly on such a day but unlike some of the other political arenas in which I have been, where I sometimes felt that people were just dying for me to make an escape, the impression I gained from the House of Lords was that everybody wanted things to go well. I have had no reason to change my views since then.
This is the third time I have risen to make a maiden contribution in a political debating chamber. It does not become any easier. Today I am only too aware of the awesome wealth of experience, knowledge and expertise that surrounds me here in the House of Lords.
I have chosen to make my maiden speech on the Education (Student Loans) Bill and so I must begin by declaring an interest. I have two daughters. One is in her second year at university and therefore has already taken out a loan. The other daughter is attempting to go back to university for a second time and I feel quite sure that she too will need to take out a loan.
I am aware also that maiden speeches are not expected to be overtly controversial but I have chosen to sit in the House of Lords as a Liberal Democrat and therefore I have a distinct viewpoint on the matter before us today. As has been said already, the Bill is primarily technical and seeks to facilitate the sale of the present student loans portfolio to the private sector. Strictly speaking, it has nothing to do with the Dearing proposals for higher education nor with the Government's intentions to require students to contribute to their tuition fees. However, I believe that there are consequences flowing from this Bill which arise in relation to those issues and I shall refer to them as I explain my reservations about the Bill.
First, I put on record that, like my Liberal Democrat colleagues in both Houses of Parliament, I have no philosophical objection to the principle of student loans or the involvement of the private sector in such a matter. I understand the need to control public borrowing and 1255 I recognise the valuable role which the private sector can play in that. That is a view shared by all major political parties now and, which is also important, it is a view shared by the Committee of Vice-Chancellors and Principals.
However, as I indicated, I have some concerns about the Bill and they fall into three main areas. First, the haste with which the Government have embarked upon the project; secondly, the detail of the Bill; and, thirdly, the fact that there appears to be little sign so far that any of the money from the sale of the loans portfolio will be used to alleviate some of the very severe funding problems that our institutes of higher education have at present.
I turn to my first point: haste. It is clear—it has been made even clearer today and it has been made clear in the past by Statements made by the Secretary of State for Education and Employment and by the Chancellor of the Exchequer—that going ahead with the sale of the student loan debt is absolutely critical for this Government if they are going to stick to the spending plans and limits of the previous government. Since that original pledge the Dearing Committee has reported and further proposals have been made for higher education. The Government are now going to remove any element of maintenance grants and many students will not receive help with their fees.
Therefore, in future years it is very obvious that students will need very much larger loans than they do currently. I know that this is a different matter from the present portfolio, but I believe that there would be some merit in not proceeding with the Bill, given those circumstances. It is clear that there will need to be further legislation in the area. In addition, I understand, like myself and my Liberal Democrat colleagues and, again, the Committee of Vice-Chancellors and Principals, that the Government do believe that the repayment of student loans should be income contingent. There is an opportunity here with the possibility of more generous loans to enable them to be repaid through a national insurance contribution scheme, or even a joint tax and national insurance scheme. That would also require further legislation.
There is also some doubt as to whether this is actually the best way of proceeding if the Government stick to the present repayment scheme as proposed with existing loans in the Bill.
I particularly draw noble Lords' attention to the views of Dr. Nicholas Barr, who is leader of the team from the London School of Economics which specialises in looking at student loans. He made it quite clear that in selling off the portfolio with the existing repayment scheme we were unlikely to get quite such a good deal as with a repayment scheme linked to national insurance. In fact, his opinion was that going ahead in a hasty way, while there are still such high levels of deferment, amounts to a waste of taxpayers' money. Although that view was put forward before Dearing reported, I believe that it still remains valid.
That brings me to my second area of concern; namely, the detail of the Bill or, on this particular point, perhaps I should say the lack of detail surrounding the conditions 1256 of sale. We have very little idea about what level of subsidy will be required for the private sector to take over the loans portfolio. I realise that there are competitive bids and therefore it is a far from simple matter.
When student loans were first introduced in 1990, the private sector was not really very interested in being involved. It was less than a year ago that the then Secretary of State for Education and Employment, the right honourable Member for Norfolk, South West, announced in a press release (after she had attempted, yet again, to tempt the private sector) that,in the event we have not been able to agree a deal which could meet their requirements"—
those of the private sector—at the right price for the taxpayer".
When in Opposition, the present Minister for schools standards said that any subsidy over 25 per cent. for the sale of the loans portfolio would be excessive.
I believe that we could see as much as a £1 billion in subsidy being paid to the private sector at a time when, as I said and others know, our higher education institutions are facing possibly some of the worst problems in funding that they have had in their history. What is more, there is every indication that £1 billion is far in excess of the amount of money that may be raised from the proposed tuition fees and any money that may go back into universities in the lifetime of this Parliament.
That brings me to my third concern. All the indications are that there is little prospect of what we hope will be £3 billion expected from the sale actually going back into the funding of higher education in this country. We need to look at that against the background of a 28 per cent. cut in student funding in the past six years and a cut in capital funding to universities last year of around 30 per cent. I should have welcomed the opportunity to talk now about the role of the public sector borrowing requirement. Those who know me will know that I have for long felt that we could deal with legislation and investment much more satisfactorily if we reformed the way that we deal with such matters. However, as this is my maiden speech perhaps I should leave that for another day.
I twice stood at the Bar of this Chamber to see your Lordships give consent to the Home Energy Conservation Act, which I sponsored as a Member of the other place. Little did I think that one day I would have the privilege of being a Member of this House. I look forward to working with all noble Lords and to being an active Member by taking part in the proceedings in your Lordships' House.
§ 3.35 p.m.
§ Lord Baker of Dorking
My Lords, on behalf of all Members in the House, perhaps I may congratulate the noble Baroness on her admirable speech. Of course, I heard her speak many times in the other place. She was the Member for Christchurch and won a celebrated by-election there. She had the great misfortune, from her point of view, of her constituency being the only Conservative gain in the avalanche of 1st May.
1257 However, what is a loss to the House of Commons is certainly a gain for the House of Lords. I am sure that we shall hear the noble Baroness speak on education, with her immediacy and great knowledge, on many occasions.
I must apologise to the Minister. I missed the first three sentences of her opening remarks. I am sorry for that. However, I did hear the rest of her speech. I welcome the Bill and congratulate the Government on introducing it. That was not how my Bill to introduce student loans was greeted back in 1988: there was considerable doubt and hostility. I shall not embarrass the noble Baroness by quoting some of her eloquent words to describe the villainy of student loans in those days when she was the Master of Birkbeck College.
I am glad to see that the principle of student loans has been accepted; namely, that the cost of higher education should be shared in a tripartite way among the state, the family and the student. After all, the greatest beneficiary of higher education is the student and he or she should contribute in some way. The Government have built upon that in a Bill we shall be discussing later in this Session by extending the principle to fees. I shall not trespass into that area.
I congratulate the Minister because I was not able at the time to persuade the Treasury to do what she is now doing. I tried to persuade the clearing banks and the Governor of the Bank of England to run the loans scheme. I was sent off by the then Chancellor of the Exchequer, Nigel Lawson, with a much worse brief. I could not persuade the banks to do it; hence we had to set up the elaborate procedure that was eventually established.
The noble Baroness has succeeded in Clause 1. If I had been allowed to offer what is now in Clause 1 of this Bill. I could have done it from the beginning. This is a measure of privatisation where the person who buys cannot lose. I did not actually hear the word "privatisation" in the Minister's speech, although perhaps she used it in the three sentences that I missed. However, I suspect that she did not use it. This is the first measure of privatisation of this Government and is therefore to be warmly welcomed. It is not exactly selling the family silver, but it is quite good pewter. I hope that it will be followed by many other measures of privatisation.
I echo the words of the noble Baroness who has just made her maiden speech. I had hoped that there would be a statement from the Government that some of the proceeds of the sale of the loans portfolio would be ploughed back into higher education, as higher education certainly needs a considerable injection of funds. However, I am afraid that the Minister did not win that battle with the Treasury. The Treasury wants this for its public sector borrowing requirement, so I am afraid that there will be no money going back into higher education. That is a matter of very great regret. I believe that something should be put back into it. Moreover, when we come to debate the next Bill on the matter, I hope very much that the Government will be persuaded that this is a much better way to deal with loans, which will be much greater in the future because 1258 they will cover fees as well as loans taken out for living purposes, and that they should be collected in a different way.
Back in 1988 I was in favour of a graduate tax but I could not persuade the government of the day to go for that. I think that probably the best way of collecting these loans will be through a form of graduate tax. As I understand it, the Government will go some of the way on that measure as regards collecting some of the money through the Inland Revenue system. The noble Baroness nods. I congratulate her on that because I could not persuade the Inland Revenue to adopt that measure.
As far as I can see, this Government are a pushover as regards all kinds of measures which, in true Treasury orthodoxy, we were not able to secure. As she has gone half of the way on that, I hope that she will go the full way and espouse the idea of a graduate tax with suitable checks and balances. That would be the neatest way of dealing with this matter. With those reservations I welcome the Bill.
§ 3.40 p.m.
§ Lord Montague of Oxford
My Lords, on this, the first occasion that I address this House I most sincerely thank noble Lords on both sides for the warmth of their individual welcomes. I wish also to thank the officials and staff of the House for their patience. Their guidance has been invaluable and I am most grateful for it.
In earlier capacities as chairman of the English Tourist Board and subsequently the National Consumer Council I had contact with many Members of this House. It is a pleasure to look forward to these cordial relationships being continued. Equally in my most recent post as Opposition representative on the Millennium Commission I had the good fortune to visit many applicants and to meet many noble Lords. Although some, I know, were rightly disappointed when a negative decision had to be taken, they still receive me with the same cordiality as those who were successful. That seems characteristic of the open-minded approach which I too hope to bring to the deliberations of this Chamber.
I am a businessman and a longstanding supporter of the Labour Party. Throughout my career I have felt it important to try to bring the business community and the Labour Party together. I started a manufacturing enterprise in the 1950s with a handful of employees in the East End of London which ultimately employed thousands of people in factories in most parts of the developed economies of the world.
It is because of the experience I gained during my 40 years of building this business that I was invited six years ago to be a governor of Oxford Brookes University where we have just under 12,000 students. Cited in the Times University Guide as top of the new universities, Oxford Brookes gained joint highest marks for research and the second highest for teaching due to the excellence of our staff. I chair the audit committee, perhaps because of my financial experience; hence my interest in the financial health of places of higher education.
1259 It is clearly welcome that the Government are continuing to think through sympathetically the wide issue of loans to students. However, that matter is not directly before us today. As we have heard, this Bill is to refinance to the private sector a major part of the existing student loans stock. Students will not be affected by these decisions. As we have heard, four banks have been shortlisted as potential buyers for the student loan book, all of them first-class banking houses.
What I wish to draw to your Lordships' attention today is an important financial facility which some of these same banks provide overseas, particularly in America, but not in the United Kingdom. I refer to private sector funding for the provision of buildings—universities' capital developments, particularly but not exclusively student residential accommodation. Until now some funds have been available from the Higher Education Funding Council for capital expenditure but this has been dramatically reduced from £350 million for the year 1995–96 to £181 million for the year 1998–99. That is a reduction over four years of some 50 per cent.
In the fairly recent past this has been supplemented by the eligibility of BES schemes for student residential accommodation. However, as we all know, there was some abuse of BES schemes which led to their being discontinued. At our university we had two of them. Nothing, however, has been created or, as far as I know, is even being considered to succeed them. The relevance of this to the student loans Bill is, as I said, that the banks which are offering to buy the loans have a speciality of making capital funds available. They do so with outstanding results. For example, the state of Rhode Island has never had a law school. The new Roger Williams School at Brown University was recently brought into being as a result of the funds it was able to obtain from a US Government sponsored, not owned, enterprise.
I am not for a moment suggesting that we should necessarily follow that model. I hope, however—I have informed the Minister about this—that the DfEE will study how the commercial sector, with the backing of the Government, might speed up initiatives to answer the capital expenditure needs of universities, particularly student residential accommodation requirements. There is, of course, an income flow from the rents which students pay which might be used for all or part of the necessary security.
I am aware of some of the private sector initiatives which the sector aspires to succeed. There are 12 which are the beneficiaries of HEFC feasibility funding, and that is welcome. However, I suspect that this is going to be difficult and slow for the immediate capital needs of universities. There is to be a half-day conference at the Café Royal on the morning of 12th December and I hope that it will help with some of the problems we face. Our university this year had initially insufficient beds for us totally to meet our policy of being able to provide on campus accommodation for all our first year students. We regard it as extremely important that all new students—most of whom are living away from home for the first time—should initially be housed on 1260 campus to ensure a partially supervised surrounding to ease their transition. Most universities have the same policy.
The number of full-time students in higher education is approximately 1 million and in further education 800,000. The Prime Minister recently announced that there will be 500,000 extra students in further and higher education by the year 2002. It is vital therefore that we continue capital investment as it takes so long to bring projects to fruition.
On Wednesday last I heard Sir Ron Dearing remind the Select Committee on Science and Technology that there is already a backlog of £450 million of university infrastructure expenditure that demands attention. Having identified a way of refinancing the student loan debt, I urge that we quickly apply our energy to finding answers to the capital expenditure needs of our universities.
§ 3.48 p.m.
§ Lord Walton of Detchant
My Lords, it is my great pleasure and privilege to have the opportunity to congratulate the noble Lord, Lord Montague, on his persuasive, thoughtful and compelling maiden speech. The noble Lord has had a most distinguished career in business. Of course one must note with great interest that he became a commander of the most excellent Order of the British Empire at the unusually early age of 38. Many of his other contributions have been listed in the annals of your Lordships' House. As he said, he has been a representative on the Millennium Commission and, since 1990, president of the Economic and Industrial Relations Society. He is a vice-president of the Royal Albert Hall. I trust that he will have the opportunity of waving his baton and contributing to the debates in your Lordships' House on many future occasions.
As the noble Baroness has said, this Bill is essentially a technical measure. It relates to the transfer of responsibility, in a financial sense, for the student loans fund to the private sector. As the noble Lord, Lord Baker said, it is to be warmly welcomed. Like the noble Lord, Lord Montague, we all hope that the private finance initiative will be successful in undertaking the capital developments in the universities which we all wish to see and which are long awaited.
I have two principal queries to pose to the noble Baroness on the Bill. Under the present rules, the Government require that any loan should be set against the public sector borrowing requirement. As my friend, the Vice-Chancellor of my former university, the University of Newcastle-upon-Tyne, Mr James Wright, said in a letter to the Secretary of State at the beginning of October,This is a subject which experts in the universities have been raising with the government for several years now",
and in other countries, including at least one in the European Union—a different treatment is introduced without there being any apparent collapse in the system of public finance. It continues:The whole thrust of Government policy and the Dearing Report is to emphasise the importance of a large and effective system of higher education for the country's general well-being.
1261It is … depressing to see the possibilities of investment in that system for the future benefit of the country frustrated by what at least some well-informed commentators see as an outdated financial theology".
I hope that the noble Baroness will be able to assure us that, under the present Government, the approach relating to the PSBR will be changed.
My second point of, I think, interest relates to the fact that I chaired the Hamlyn Foundation National Commission on Education which made a number of salient recommendations relating to the financing of the universities and higher education, and student loans. We were told repeatedly that the Government have always resisted the use of the tax or national insurance system to collect other funds. We were told that the Inland Revenue and the Treasury would never stand for it. In 1993, in our report, Learning to Succeed, we asked the justification for maintaining this position. The Government have the power to change those practices. Should they not do so in order to create a more acceptable and workable scheme? I refer to one that is far more acceptable to the students than the present system of having to write a cheque in repayment from time to time after they have graduated and are in employment. We did not propose a graduate tax along the Australian lines. That is a lifetime contribution to income tax. We proposed that a repayment of the loan should be made through the tax system once the individual had reached an acceptable level of income, with an arrangement to stop the clock if for any reason a woman may have a family, or someone may be temporarily unemployed—his income fell below a certain level. Our proposal was that the loan should be paid through the tax system until it had been totally paid off. Happily, that proposal was accepted by the Dearing Committee.
On 19th November at col. 566 of Hansard, I asked a question of the noble Lord, Lord Whitty. I was told, as the previous government had told us, that the income tax system was not there for debt collection. But, lo and behold, in the Teaching and Higher Education Bill, to be debated in your Lordships' House next week, under Clause 16 there is a provision that arrangements may be made for the collection and repayment of the loans with the assistance of the Inland Revenue. I warmly congratulate the Government on their change of heart and express the hope that that will be implemented.
In the light of that decision, perhaps I may ask the noble Baroness, Lady Blackstone, whether Clause 2 of the Bill will require an amendment to allow such a mechanism, or will regulations under Clause 2 suffice to allow that mechanism of repayment to be introduced?
With those few comments, I greatly welcome the Bill.
§ 3.54 p.m.
§ Lord Davies of Oldham
My Lords, it is a pleasure to follow the contribution by the noble Lord, Lord Walton of Detchant. We all recognise the significance of the role the noble Lord played on the National Commission on Education, to which he made reference. Its work is bearing fruit in some developments of policy with regard to student support, which the Government will be putting forward in a Bill next week.
1262 I congratulate the maiden speakers on the strength and accuracy of their speeches and on the fact that they have chosen a debate on higher education to make their contributions. It signals how important the subject is to this House and to the welfare of the nation. I pay tribute to noble Lords for the large attendance in the House on a Bill which I regard as a somewhat sorry little measure.
The Bill is made necessary because the Government had a somewhat tawdry inheritance from the previous government. The reason for the Bill is straightforward. Inserted into the government spending plans and Budget projections in the last Conservative Budget was £1.5 billion for each of the next two years as the product of the sale of the student debt. Unless on coming into government we were to see a complete revolution in the national finances and a significant replacement of those figures there was no option but for the Government to pursue this measure. Arithmetic gives the same answer, whoever asks the question. The arithmetic stands up in terms of the Budget position.
Turning round state expenditure of this volume, and with the changes we wish to see during the progress of this Administration, will take a number of years. It is quite clear that in the short term certain paths are already well designated. The Government have clearly indicated—they will be made apparent in the presentation of the proposed Bill next week—the longer term post-Dearing arrangements for student finance. However, at present there needs to be an adjustment to take into account the necessity of raising the £1.5 billion in the next two Budgets from the sale of the immediate debt.
The problem is, as the last government found—the present Government inevitably inherited it—that there are certain difficulties with the product that is being sold. At the root of the problem has been the fact that criticisms of the student loans scheme related crucially to the organisation of the scheme and to the fact that students would have to repay over a short period of working life; namely, in their first five years of earning power once they had crossed the threshold. The result was that higher education teachers and students reacted with alarm to the Government's proposals. They were severely critical of them at that time. The scheme has not enjoyed even a two-thirds take-up by those students who were entitled to do so. Yet we reflect upon the fact that many students in higher education are in real need but are loath to participate in a scheme that until now has put a burden of debt round their necks which has to be repaid within the first five years of earning power.
The scheme got off to a somewhat rocky start. After a short time, the first chief executive left office after pressure when it was discovered that he was spending at least as much time running a private restaurant as attending to the needs of students in the student loans scheme; and at one period 7 per cent. of students failed to obtain their loans on time—that is, 35,000 students. That averaged 60 students for each Member of Parliament. I speak from bitter experience. In my constituency I think that all 60 students contacted me about their concerns. I am sure that that was the general experience in another place.
1263 The Government sought to sell this package in 1995 through the student loans legislation. They adopted the twin-track approach. We could never find in the City any real enthusiasm for their proposals at that time and we said so repeatedly at every stage of the Bill. The same criticisms were also voiced in this House when the Bill appeared before your Lordships, and of course they were proven right. In fact, the then government in 1995–96 were unable to sell that particular form of loan. Therefore, I have to say to the Minister that I recognise the constraints under which she works but I am not hugely optimistic about getting a good deal against such a flawed position.
I am reassured that the Bill contains important guarantees for students; namely, that the terms of their loans cannot be changed by the private lender and that the terms are guaranteed. This indicates that the Government, quite rightly, have a real interest in ensuring that students take out loans on proper terms which last throughout the period of the loan. I am also reassured that the independent assessor will remain in place to adjudicate if difficulties should arise. Indeed, some difficulties are bound to arise even if only in a small minority of cases.
On the whole, I regard this Bill as a somewhat mulish little measure, without pride of ancestry or any hope for posterity. It is only acceptable in as much as the Government have already guaranteed the future development of an entirely different scheme on different principles for students over a lifetime so that their loans will be repaid according to their ability to repay the considerable principal while the income continues.
I am also pleased that the loans will be collected through the Inland Revenue. Both proposals have been canvassed in significant circles within this nation for almost a decade and it is therefore with some delight that I congratulate the Government on having made rapid progress, the fruits of which we should see in a fairly short time. On that basis, though without enthusiasm, I accept the terms of this particular measure.
§ 4.3 p.m.
§ Baroness Darcy de Knayth
My Lords, I should like to thank the Minister for her clear and comprehensive introduction to the Bill. I shall be quite brief because I just want to ask her a couple of questions about the special arrangements for students with disabilities; first, when calculating the income of disabled borrowers and, secondly, about exercising discretion over the terms of the repayment. I hope that the Minister will be able to give me some assurances that they will remain the same and we can thus avoid the need for a probing amendment being raised in Committee.
As things stand, special consideration is given to disabled borrowers. This was very much thanks to my noble friend Lord Henderson of Brompton who, during the passage of the 1990 Act, successfully divided the House at Third Reading, and to the other place, which gave the Bill a felicitous tweak and returned it to us in an improved condition. The amendments which followed included an arrangement that disability-related 1264 benefits would not be taken account of when calculating the income of the borrower to determine whether the level of income would bring the borrower over the repayment threshold of 85 per cent. of the average income. There is also Regulation 10, which allows the Student Loans Company to exercise discretion over the terms of repayment for disabled borrowers who make particular application to them.
At present the Student Loans Company states that all disabled people they are aware of are deferring payments because their income falls below the 85 per cent, but nobody that they know of is using the discretionary arrangements or indeed has asked for them under Regulation 10. It is not clear whether this is because they do not know about it because they do not need it, or whether it is because absolutely no disabled borrowers come over the threshold anyway; that is, the threshold that makes them eligible. Can the Minister give me an assurance that these arrangements will continue? This disability-related disregard is very important, bearing in mind the extra disabled living costs that people with disabilities face.
The discretionary arrangements under Regulation 10 may never have been used as yet, but they are nonetheless valuable and SKILL, which is the National Bureau for Students with Disabilities—and here I have to declare an interest as president of SKILL—states that it is most important that this arrangement should continue to be available. I hope that the Minister can respond positively and offer assurances that the terms for disabled borrowers will continue as before. I look forward to hearing her reply and, if we do need to explore the details, perhaps we could pursue the matter in Committee.
§ 4.5 p.m.
§ Lord Desai
My Lords, this is a story of human imperfection. We must try our best to resolve the matter without too much trouble. As many noble Lords have already said, this is a modest Bill. If, as the noble Lord, Lord Baker, said, he had been luckier with the Treasury, and had the political situation been better, we would have started the student loan system on the basis that repayment of a contingent loan would have been collected by the Inland Revenue. That would have represented the best possible outcome, but that did not happen. That is yet to come in the future. In the meantime we have to look at the new Bill. It is like putting an unwanted child up for adoption: that is the best I can think of.
Again, in a better world, as the noble Baroness, Lady Maddock, said in her excellent maiden speech, would we need to do this yet? It seems to me that with a little bit more on the PSBR—with a billion here or a billion there—we could actually merge this into the new system and make the debts collectable by the Inland Revenue. That might mean a reduced amount of default and if subsidy were not necessary, we might manoeuvre the Student Loans Company into the next part of the loan enterprise and have an ideal solution.
However, the world is not made for ideal solutions: it is made for such solutions as we can find. So this modest Bill is with us now: it is the best we can do. As 1265 many other speakers have said, I hope that we can achieve three things. Obviously, we want to ensure that the current conditions of the loan are not altered, so that the borrowers may feel no anxiety. We hope that the lenders, the people who have bid for this loan company, are enterprising and good people and that they will offer a good price and require as little subsidy as possible. Lastly, we have to hope that, whatever happens, this sale gives the Government value for money. There is nothing more to say, because everything I was going to say has been said by other speakers.
§ 4.8 p.m.
§ Baroness Carnegy of Lour
My Lords, unlike most previous speakers, I find it is not easy to form an opinion on this Bill. It is clearly right that the private sector, with its knowledge and expertise and available resources, should become involved to the greatest extent possible in the funding and organisation of student loans. At Second Reading in another place many of the nationalists disagreed with that principle and voted against, although I have to remind the noble Baroness, Lady Maddock, that by Third Reading the Liberal Democrats appeared to have changed their minds, and they, too, voted against.
This Bill continues, as my noble friend Lord Baker of Dorking reminded us—and he certainly should know—where the last Government left off, and I am sure that that is wise. But to judge, in the context of where we are now, whether the proposals are likely to work effectively and cost effectively for the student and the taxpayer, it seems to me that we need to know a good deal more than the text of the Bill tells us. From what the Minister told us this afternoon, final decisions are still some way off, but we need to know roughly, if not precisely, what order of subsidy private sector bodies will demand in order to enter the scheme. It seems that those private sector bodies are in a pretty strong position to make demands in their present negotiations since they know that the Chancellor requires, willy-nilly, £1.6 million from the deal this year and £1.5 million next year, perhaps partly for higher education but certainly for other purposes.
We need to know, if we are to judge the merits of the Bill, what order of subsidy will be necessary if the deals are to be made. But we need to know more than that, I suggest. As has been hinted at by other noble Lords, we need to know what the connection is between this Bill and the Teaching and Higher Education Bill which the House will debate next week. The Government have told us repeatedly—although the Minister did not say it today—that the two Bills are quite separate. I think I understood my noble friend Lord Baker to assume that to be the case, as did other noble Lords. But it is not stated in this Bill.
We need to know for certain whether the Bill is only concerned with loans to students already in the system and funded under the present regime, or whether the Bill is also establishing a framework for funding future loans to students who will enter higher education in the circumstances proposed by the Teaching and Higher Education Bill. If this Bill is intended in any way to establish a continuing framework then clearly future 1266 requirements for subsidy and thus for the cost-effectiveness to the taxpayer of the arrangements will be even harder to estimate than at present.
The added uncertainties for private sector lenders which the Teaching and Higher Education Bill funding proposals would bring are many and various. There are likely to be large unforeseeable changes in the demand for loans as a result of the ending of maintenance grants, if that comes about, and the introduction of means-tested tuition fees. If I read the Teaching and Higher Education Bill correctly, there will be considerable scope for political intervention in the arrangements, by government and by Parliament. A number of arrangements exist with the laudable aim of protecting students, but they make for great uncertainty for those who are granting the loans.
If the Bill's arrangements are set to continue into the future, those and other major uncertainties will mean risks for the private sector much greater than those which exist at present. So it seems to me that the subsidies required are likely to be very much greater. When the Minister replies, I wonder whether she could clarify that important point. Is it intended that this Bill and the regime it sets up will continue in force after the Teaching and Higher Education Bill comes into effect? We need to know the answer to that question.
The Government's own financial and manpower memoranda to the Bill show the main problems in assessing the merits and de-merits of the Bill. The second paragraph concerning the financial effects of the Bill admits openly that the increase in public expenditure will depend on the amount the Government receive for the sale of the loans and on the amount of subsidy required to achieve the sale. Over the page, on the effect on public service manpower, we read that the number of staff employed by the Student Loans Company "may increase a little". But any such increase would be more than offset, we are told, if the portfolio purchasers decided not to use the Student Loans Company to administer the loans. Those are considerable uncertainties and the financial and manpower memoranda are astonishingly vague.
Perhaps that is unavoidable, but the uncertainties are enormous. I presume that the House will give the Bill a Second Reading, and I shall certainly support it. But I hope that in addition to answering the questions that I and others have put to her today, the Minister will be able to provide us with more hard facts, at any rate before we come to Committee stage. Without them it will be difficult to assess the Bill.
§ 4.16 p.m.
§ Lord Grantley
My Lords, I warmly congratulate the Government on introducing this very welcome privatisation Bill. On the surface it looks like a purely technical measure to facilitate the transfer of the funding of student loans from the Government to the private sector, to help the Government achieve their spending targets. But I do not believe that the Bill is either purely technical or just modest. On the contrary, I think it is revolutionary in its implications. Just as privatised industries have benefited from having their investment 1267 programmes freed from the constraints of the public sector borrowing requirement, so the privatisation of funding student loans could, over time, lead to a significant increase in the resources available to higher education, particularly when future generations of students come to realise what very good value the loans represent.
However, as a banker, I wish to focus this afternoon on the technical aspects, particularly with a view to protecting the interests of the taxpayer in relation to the amounts of subsidy the Government will have to pay after privatisation. As unfortunately I expect to be unable to participate in the remaining stages of the Bill, I hope I may be forgiven for raising a number of technical points today—dull points of detail. I shall not be in the least offended if there is a mass exodus of your Lordships towards the Tea Room.
I have reviewed the standard loan agreement which students currently enter into with the Student Loans Company. From a banking standpoint, it is a very curious document. The main oddity is that students pay interest by monthly capitalisation of principal at,such rates as appear to the Secretary of State to be requisite for maintaining the value [of the loan) in real terms".
The loan agreement says nothing about when or how often the Secretary of State will determine the interest rate or whether students have a right to notification every time it changes or what prices index will be used. I understand that in practice the Secretary of State expects to determine the interest rate once a year, using the Retail Prices Index, and to use the historic annual rate for the purpose of calculating interest to be capitalised in the year ahead. That is welcome clarification, but really those matters need to be set out in the loan agreements.
On a related matter, the monthly repayment of principal is to be calculated as a proportion of,the amount of the loan outstanding on the calculation date plus interest which will accrue during the period of repayment then remaining".
The oddity in this case is that interest "which will accrue" can only be estimated, since no one knows what will happen to the relevant prices index over the remaining period of the loan. On what basis will the Secretary of State perform that estimate and what will happen later on when actual inflation turns out, as it certainly will, to be different from estimated inflation?
Another curiosity—at least to my mind—is the independent complaints procedure outlined in Clause 1(5) of the Bill, whereby students will be able to make complaints to an independent assessor about the administration of their loans. That seems to me to be an unnecessary piece of window dressing. I have not come across a feature of that type in other loan agreements. It is generally accepted that, provided loan agreements are sufficiently clear, normal remedies are adequate. I should be interested to know why that may not be the case for student loans. I should also like to know what sort of complaints the Government have in mind and how many civil servants they expect the independent assessor to need in order to deal with them.
1268 I understand that a revised form of loan agreement will be forthcoming in the new year. I hope that the Government will pay careful attention to the views of competing financial institutions and their legal advisers on the documentation as a whole. In connection with the PFI programme, there were occasions when the last government failed to attach sufficient weight to those views, with the result that the PFI programme was delayed. I hope that this Government will avoid that mistake.
I notice that the Minister in another place said that the standard sale agreement with the purchaser will be placed in the Library in due course. I should be grateful if the noble Baroness could indicate when she expects that to happen.
The main factors which will influence the price that financial institutions are willing to pay for the loan portfolios are their assessment of the credit risk and, as important, the cost of administration. On the first point, the Bill's Explanatory and Financial Memorandum states that the amount of subsidy will be dependent inter alia on,the extent to which borrowers default on their loans".
The Notes on Clauses give some small clarification of that in stating that the subsidy payments which the Secretary of State is authorised to make under Clause 1(3),may take the form of … compensation for default to a particular level".
However, when introducing the Bill the noble Baroness said that the selling of loans will transfer to private sector financial institutions the credit risk currently borne by government. I had understood that that was one of the main objectives of the Bill and I should be grateful if the Minister could explain the apparent inconsistency between what she said and those other two statements.
My main concern is with the second point—the cost of administration. It must be borne in mind that the loan portfolios comprise a large number of relatively small value loans. The costs of administration could potentially be horrendous and it is crucial that the Government make every effort to make the system as simple as possible to administer. I am concerned that the previous government chose to use a floating rate of interest; namely, inflation. It would be much simpler to have a single fixed rate of interest applicable to all loans commencing in any one financial year and remaining unchanged over the life of the loan.
For example, if it is important to the Government that the interest rate should be based on average inflation, they could project the average inflation rate to the end of the loan period—let us say 3 per cent. a year—and then stipulate 3 per cent. as a fixed rate for all the loans commencing in that year. Besides the savings in administration, there would be other advantages. Students would be able to predict with certainty their future liabilities and the Government would be able, if they wished, to crystallise up front their liability to pay subsidy over time by the use of the interest rate SWAP 1269 market which they cannot do in the case of loans indexed to inflation as there is no market for SWAPs between inflation and market interest rates.
The interest equalisation system associated with fixed rate lending has long been deployed in the export finance market, in which I was active for some years. It was well understood by financial institutions and cheap to administer. I am sorry to see that Clause 2(4) of the Bill, which was introduced at the Report stage in another place without any debate, perpetuates the inflation linked system. I urge the Government to reconsider that matter on future loans.
The other point to be made on administration is that it will be cheaper for repayments to be made, where possible. through the payroll or through the Inland Revenue. I am delighted to hear that the Government have decided to accept the recommendation of the Dearing Report to use the Inland Revenue.
Student loans, like mortgage loans and credit card receivables, would seem to be a natural candidate for the securitisation market. In that market the normal procedure is to establish a vehicle company which issues debt securities to the public secured on receivables under the loan and, in this case, under the sale and subsidy agreement. The cost of such debt is often cheaper than in the banking markets as the securities are tradable and there is no need to pay the cost of using banks' balance sheets.
Another advantage of securitisation, where the securities are publicly listed, is that all the parties, including the Government, have a clear and objective bench mark for the pricing of future debt sales. I understand that there is a substantial track record of securitising student loans in the United States. I hope that the Government will avail themselves of the lessons of that experience.
My final point is that no student in his right mind will prepay the loan ahead of schedule as the interest rate is so attractive, being well below the rate at which the funds could be reinvested. In fact, it looks as though students will have a strong incentive to default as the loans are unsecured and there is no default interest rate. At present the only remedy that lenders have is acceleration, which may not be useful in the absence of enforceable security. Even richer ex-students may be unable to pay accelerated amounts.
What do the Government intend should happen if students who are able to repay choose not to do so? Will financial institutions be able to invoke cross-default clauses under other loans the students may have to those same institutions and to exercise any security thereunder? I suggest that in respect of future loans the best solution would be for the Government to insert a default interest rate into the loan agreement.
I shall be fascinated to see how the scheme works in practice and I wish the Government every success in the first round of sales.
§ 4.26 p.m.
§ Lord Tope
My Lords, I must begin by declaring an interest which I fear may turn into a pecuniary interest in that both my sons have student loans.
1270 This has been an interesting debate, although somewhat briefer and more one-sided than I expected. However, it was characterised by two particularly good maiden speeches. I am sure that the noble Lord, Lord Montague, will forgive me if I concentrate mainly on the speech of my noble friend Lady Maddock. I do that not only because she is my noble friend, but because she is also my friend in the full meaning of that word: and not only because I agreed (not surprisingly) with every word she had to say, but perhaps for an even more personal reason of which even she may not be aware.
Twenty-five years ago this week I too was an unexpected by-election winner—one of those famous Liberal by-election victories of yesteryear, which was at that time a record swing against a Conservative government. My colleagues sitting alongside me may not be too pleased to hear that, but that was a record which lasted unbroken until the Christchurch by-election. Others have said that records are made to be broken and I can think of no better person to have broken that record than my noble friend.
I suspect that both of us, when we became by-election candidates, were not too certain of our arrival in the other place. At that time if anyone had suggested that either of us would be arriving in this place we would both have felt that the world had gone mad. However, we are both here. I am delighted that my noble friend is here. She made an excellent maiden speech which set out my party's position on this Bill, but not in a controversial way.
There have been times during the debate when I felt rather like an unwelcome guest at a cosy family party. Many speakers have welcomed the Bill. Indeed, I thought at times the noble Lord would tell us that he regretted being in the wrong government because this Government seem to have been managing better than that of which he had been a Member.
I do not welcome this Bill. I agree with the noble Lord, Lord Davies: it is a mulish Bill. For reasons which I understand, we have the Bill because the Government have put themselves in a straitjacket. It is an education Bill that does nothing for education. It is an education Bill that does nothing for students. The sole reason for the Bill, as indeed the Minister has explained, is to enable the Government to meet their own self-imposed expenditure restrictions. I understand that the Government have bound themselves to those expenditure restrictions. But others of us are not so bound, and we do not therefore need to welcome the Bill.
My noble friend Lady Maddock explained—and I shall echo—that the Liberal Democrats have no philosophical difficulty with the principle of student loans. Our concern today is that the loans which the Government are likely to offer students are not large enough to cover their real expenses and that they will still have to go cap in hand to commercial banks. Not only that, but there are students who are left outside the student loans system altogether as it is presently conceived. My party would want loans to be available to support part-time courses. We also think it is high 1271 time that consideration be given to offering them to those in further education who get no help at all at present.
We have no difficulty with the principle of student loans; nor is there necessarily anything wrong with involving the private sector, as the Bill proposes. However, I am concerned that the bargain basement sale that the Government are organising is selling the public short. Noble Lords will be familiar with the doctrine of caveat etnptor—let the buyer beware. I am bound to say that what we have here is more a case of caveat venditor—let the seller beware. I fear that we are about to throw away valuable assets. Indeed, if I recall correctly, the noble Lord, Lord Baker, said that it was a privatisation in which the buyer could not lose.
Under the proposals of the Bill the Secretary of State can pay any subsidy he likes to City buyers. He can guarantee any losses incurred through default. Our complaint this afternoon is that, despite our earlier protestations, the Bill still contains no measures to limit the extent of those subsidies. We are told by the Minister that we have a strong competition in relation to the student loans book. I seem to recall in an earlier debate on student loans hearing exactly the same from the government then sitting on those Benches. It is to be hoped that this time it is the case. In view of that, why are Ministers so cagey about the extent of the subsidies? We seem to be in the situation of having a product which is worth selling and yet we are cheerfully continuing to shower the customers with free offers. The Government have said that they will, at the proper time, publish the list of the bidding companies. I wonder whether the Minister is able to tell us when publication is likely to take place.
This might be acceptable were not the Government's spending plans so tight. But the student loan portfolio that is to be knocked down to the City at unrepeatable sale prices is a national asset worth £3.1 billion. I seem to recall howls of protests from the Labour Party in opposition when the National Grid and Railtrack were sold off at knock-down prices to the so-called "fat cats" of the City. Noble Lords may well wish to ask themselves what is the difference here.
We have asked that the subsidy should be kept down below one-quarter of the amount originally advanced. That is not an unreasonable or extreme request. It is in fact precisely the request that the Labour Party made when it was in opposition and it made its amendment to the 1995 Bill. It was reasonable then; and in view of the increased interest in the sale, it is even more reasonable now. If the subsidy is allowed by default, or by weak negotiation, to rise above that figure, we are talking of a loss to the taxpayer of perhaps £1 billion of the £3.1 billion involved. If this money is given away by the Minister, he is giving away money that could stave off for the lifetime of this Parliament the need to introduce tuition fees at all.
Other speakers have regretted the fact that none of the proceeds of the sale is going to benefit higher education. When that was first said, I noted that the Minister looked with either surprise or disagreement. I hope she is able to assure us that the proceeds of the sale, or at 1272 least some of the proceeds of the sale, will go to the benefit of higher education. However, I suspect that it is the other way around. Were it not for the proceeds of the sale, there would be even less money for higher education, or for education generally, as her department would be in deficit and cuts would have to be made elsewhere. That is not extra money for higher education. It is saving higher education from more cuts. That is a very important difference.
I want to repeat our plea that the Treasury takes seriously the proposal to alter its accounting procedures so that student loans are not counted as public spending. If that principle could be applied to the existing portfolio, we could perhaps reconsider whether to proceed at all with the second tranche of the £1.5 billion sale next year.
Finally, I want to refer to some of the questions asked by the noble Baroness, Lady Carnegy, with regard to the Bill to which we shall be giving a Second Reading next week—the Teaching and Higher Education Bill. Like, I am sure, other noble Lords, I have spent the past few days looking at the Bill and, as is sometimes my practice with the detective stories I read, I started at the back of the Bill. The last words of the Teaching and Higher Education Bill come in Schedule 3—the list of legislation to be repealed. The last words say that to be repealed is the Education (Student Loans) Act 1997—the whole Act. If next week we are to start the process of repealing what will be an Act to which today we are giving a Second Reading, I have to ask why we are here this afternoon. All I can say is that it is probable that the Bill before us today will last on the statute book for one of the shortest periods ever; and that, at least, is something we can welcome.
§ 4.36 p.m.
§ Baroness Blatch
My Lords, I begin by joining other noble Lords in congratulating the noble Lord, Lord Montague of Oxford, and the noble Baroness, Lady Maddock, on their excellent maiden speeches. I know that the House will be anxious to hear them participate in our debates in future.
We generally welcome the Bill. As the noble Baroness, Lady Blackstone, said in setting out the terms of the Bill, it follows on from where the previous government left off; so much so that I suspect much of the Bill before the House today was in preparation when the noble Baroness took office, although, as a number of noble Lords have said, some interesting pieces have been added. It is entirely appropriate that the private sector should be given a role in managing the student loans system.
The noble Baroness used the strictures of the previous government's spending limits. That was offered as the only reason for the Bill. Like the noble Lord, Lord Tope, I want to continue to remind the Government that those limits were self-imposed. They are causing enormous tensions—and just a ripple of tension on the Back Benches opposite. But I have to say that, in another place, that self-imposition is certainly causing great tensions.
1273 I join my noble friend Lord Baker of Dorking in welcoming the Bill and would pose the question that the generous terms obviously agreed with the Treasury put the prospective purchasers in a "cannot lose" situation. It is not possible, as my noble friend Lady Carnegy pointed out, to tell from what the Minister said about the Bill whether the predicted income from the sale in each of the first two years can be realised. Are the Government on target for realising £1.6 billion, not next year—I say that to the noble Lord, Lord Davies of Oldham—but this year? Only 16 weeks are left of this financial year, yet the Government are committed to finding £1.6 billion in this financial year and £1.5 billion in the financial year 1998–99. I agree with my noble friend Lady Carnegy. We could do with more details in order to make a judgment as to where we are at this time.
The noble Baroness, Lady Blackstone, also referred to the twin-track approach—the public-private arrangements—considered by the previous government and provided for in the 1996 Act. However, it is a matter of record that, following negotiations, the twin-track model did not proceed; and—I might say to my noble friend Lord Baker—for the very reason that we were not able to be as generous. We were not able to convince the Treasury in the way that the noble Baroness and her colleagues have.
The noble Lord, Lord Davies of Oldham, used a rather unfortunate expression. I use it back at him. He said that the Government had a "tawdry inheritance" from the previous government. This Government inherited an extremely healthy economy which even the Chancellor of the Exchequer has now had to recognise.
The noble Lord, Lord Davies of Oldham, also referred to the repayment arrangements of the present system of student loans. He was quite wrong in what he said. Students are not required to repay their loans in the first five years of earning. No student is required to pay one penny of the loan until he or she is earning at or above 85 per cent. of the national average wage, which is between £16,500 and £17,000. There are not too many people who walk straight out of university into a job and earn that kind of money. If there are, then the terms of the loan are affordable. There are many students, even those who took out a loan in the first year of it coming into force, who have not yet paid. There may be some who will never pay because, from choice, they are operating in the low-income sector or because, unfortunately, they remain in that sector. So it is not right to say that in the first five years of earning, students are required to repay the loan.
The noble Baroness, Lady Blackstone, made clear that today is not the occasion to debate the Dearing Report and its consequences for future policy. I agree. Therefore, I shall resist what is a very great temptation. The debate will come next week.
There are a number of questions. First, when will the last loan payments under the existing system be paid to students? Secondly, what will be the future of the private sector company—a question posed in a slightly different form by my noble friend Lady Carnegywhich purchases the debt and which will be set up as a 1274 result of this Bill? Will it wither on the vine as and when the loans made to students under the present system are repaid'? The noble Lord, Lord Tope, had rather more of an eagle eye than I when poring over the Bill. He picked up that the measure will be repealed as a result of the Bill to be introduced into the House next week. It may be that that answers my question. This company will be set up in business but there will be repeal almost before the ink is dry on the contract. That cannot be the case because the students who are the subject of loans under the present system will go on paying back, not through the Inland Revenue System but through the present arrangements. It would be very interesting to discover how that is going to be managed. Does it mean that the purchasing companies, the banks, who will be picking up this business, will be buying a diminishing return?
Are we to assume, subject to parliamentary approval of this Bill and the subsequent secondary legislation, that the Inland Revenue will be solely responsible for the recovery of debt for loans under the new arrangements and that therefore no role whatever is envisaged for the private sector in the new arrangements? What progress has been made on pursuing the interest shown by the private sector? Can we have an update on the present position as regards the level of interest shown and the state reached in the negotiations? What will be the impact on the PSBR of the measures in this Bill? I have to ask, as a prerequisite for next week's debate, what is the expected impact on the PSBR of the new arrangements for student loans?
It depresses me to have to ask the question across the Dispatch Box but can we have copies of the letter sent by Mr. Blunkett, the Secretary of State, with the intention of calming the nerves of the student population, their parents and schools? I understand that a round robin letter has gone out. It has always been customary that copies of such correspondence are given to shadow Ministers. I, and I am sure, all noble Lords in the House would be grateful to have a copy of the letter.
I must use this opportunity to record very considerable disquiet about the lack of real information as regards loans, especially to those potential students applying now for places at university for the coming academic year, even given the letter that they have apparently received from the Secretary of State. They still do not know the detail of what they can expect when they take up their places in 1998-99. It is not good enough that they glean it from newspapers, perhaps as a result of a Question in this House or another place. It is important that they understand the details.
If I understand the position correctly, the Bill to be introduced next week will have to go through this House, followed by its passage in another place, with possible to-ing and fro-ing between the two Houses while the Bill is put into a form for Royal Assent. After that there will be secondary legislation which has to go before both Houses. That is going to take a very long time and will proceed well beyond the date when young people are making their choices and taking up places at university. I find that situation pretty unacceptable.
It is unlikely that on these Benches I shall be seeking to amend this Bill. I say that it is unlikely because I have learnt the hard way never to say never in politics.
1275 As a final point, we shall reserve our energies for the Teaching and Higher Education Bill, which is to be introduced next week, because, as the noble Lord, Lord Tope, said, this matter has a very short life indeed.
§ 4.46 p.m.
§ Baroness Blackstone
My Lords, perhaps I may begin by congratulating the noble Baroness, Lady Maddock, and my noble friend Lord Montague of Oxford for their really excellent maiden speeches. I am sure that I speak for all Members of your Lordships' House when I say how much we enjoyed them and how much we look forward to hearing from them again in future debates.
A great many questions have been put to me in the course of this debate. Some of them have been of an extremely technical nature. I believe that the noble Lord, Lord Grantley, admitted that some of the points that he was raising were more appropriate as amendments for Committee stage. I endorse what he admitted. They were not really suitable points for a Second Reading debate. I hope that he will forgive me if I do not address some of the very technical issues that he raised. However, I shall of course write to him. He will be free to raise any of the questions at Committee stage if he is able to be present.
We have had a very interesting and useful debate, which has raised many broad and generous questions as is appropriate at a Second Reading of this kind. I am very grateful to the noble Baroness, Lady Blatch, and to the noble Lords, Lord Baker, Lord Walton of Detchant, and Lord Grantley, and also to my noble friends for welcoming this Bill with, in one or two cases, a little bit of hesitation. I am only sorry that the noble Lord, Lord Tope, was unable to welcome it. I believe that he was the exception in this debate.
Perhaps I may clear up something with the noble Baroness, Lady Carnegy of Lour. She questioned whether I had made it clear that this Bill was completely separate from the legislation that we shall be bringing in relating to the recommendations of the Dearing Report. I made it absolutely clear. I shall quote what I said so that we are all clear. I said,I would like right at the outset to make it clear … that this Bill has nothing to do with the Dearing Report or the Government's response to it. Our proposals for the future of student funding have been brought before the House in the Teaching and Higher Education Bill,
which we are going to debate next week, as Members of your Lordships' House present today are aware. I want to make that absolutely clear. I also made it absolutely clear that the Bill before us today relates solely to the existing student loan regime and the debt that we intend to sell to the private sector. It does not in any way relate to the new regime. It is perhaps helpful that I make that clarification right at the very beginning.
Perhaps I may advise the noble Lord, Lord Baker, that he was wrong to suggest that I opposed the introduction of student loans in 1990 when he and his right honourable friend John MacGregor (who, I think, succeeded him) introduced the Education (Student Loans) Bill. I always said that I had nothing against the loans in principle, but I opposed the scheme that his 1276 government introduced because, among other reasons, the methods of collection seemed likely to be administratively difficult, top-heavy and would probably lead to substantial levels of default. It is important to distinguish between issues of principle and matters of detail.
I want to re-emphasise the fact that this is a straightforward Bill. We have made it clear that the receipts from the sale of student loans are crucial to enable us to meet inherited spending plans for the next two years. The Bill also emphasises our commitment to the development of public/private partnerships. I am glad that there has been so much support around the House for new and imaginative forms of public/private partnership.
As I mentioned earlier, the Bill provides safeguards for borrowers. It freezes the significant terms of their loan agreements, preventing purchasers from varying these key terms when the loans are sold. The Bill protects borrowers and ensures that the key terms of their loan agreements remain unchanged. I am grateful to my noble friend Lord Davies of Oldham for recognising that those safeguards are built into the Bill. The purchaser is also protected from costs arising from such changes to the key terms of loan agreements. Purchasers will price their bids effectively without having to take account of possible future changes to the terms of the loans.
My noble friend Lord Montague of Oxford raised the issue of the capital expenditure needs of our higher education institutions. He spoke persuasively about the issue of private sector involvement in the provision of new higher education facilities, particularly residential accommodation for students. As he will be aware, higher education institutions already lever in private funds to a considerable extent. I can say this as a former head of a higher education institution who raised a great deal of private money for that institution.
It is estimated that commercial borrowing by the higher education sector is around £1.6 billion. The noble Lord also referred to the private finance initiative. Three of the PFI "pathfinder" projects being supported by the Higher Education Funding Council for England include new student accommodation. The Government are also keen to encourage other forms of public/private partnerships. Officials from my department meet representatives of private sector companies, including those from the financial sector, on a regular basis. We want that to continue. If such companies have specific ideas about measures which could be taken to encourage further private sector investment in higher education, we would welcome them.
My noble friend Lord Montague also drew attention to the strains on the university research infrastructure. These are, of course, just one aspect of the overall higher education funding difficulties inherited by the Government, which the Dearing Report highlighted.
We have, however, moved swiftly to show that we are ready to tackle the general higher education funding problem to which several noble Lords referred. We have made clear that the savings from the introduction of tuition fees through the other Bill for students from 1277 better-off families would be used to improve quality, standards and opportunity for all in further and higher education. But it will, of course, take time for our proposals to begin to generate additional money, because there will be an initial increase in costs to public funds, as loans replace maintenance grants. This extra outlay will at first offset the yield from the introduction of tuition fees for students from better-off families. We shall debate that matter next week and there will be an opportunity to say more about it then.
In the meantime, the higher education funding councils have mounted a joint research equipment initiative, run with the help of the research councils, which has been successful in attracting matching private funding. For our part, we have already announced a package of measures which, taking account of the income from tuition fees, will allow an extra £165 million to be spent on higher education in 1998–99. This includes an additional £125 million for universities and colleges in England to maintain quality and to tackle the backlog of maintenance and equipment replacement. I hope that that reassures my noble friend Lord Montague. It will also allow a further £4 million for some limited expansion.
Since 1995 the HEFCE has received a single grant for recurrent and capital purposes. Universities and colleges have full flexibility to manage their recurrent and capital allocations from within their total grant. We have asked the funding council to encourage institutions to make appropriate provision to maintain and update their equipment and estates. I hope that that reassures my noble friend.
The noble Baroness, Lady Darcy de Knayth, referred to disabled borrowers. Our objective is to ensure under the new contractual arrangements that they should receive no less favourable treatment than at present. We are still looking at the details. We would be happy to consider any representations that she or any other Member of your Lordships' House may want to make on the issue. We shall make the precise details of the arrangements clear when the regulations for this Bill are published in the New Year. However, I hope that the noble Baroness will accept my assurance that the position of disabled borrowers will be fully protected. They will retain the right to favourable treatment just as now. As the noble Baroness mentioned, the existing special provisions have never been applied in the seven years of the scheme's existence. That is because disabled borrowers can usually defer on income grounds, so the special provisions have never been required. However, those provisions are, and will continue to be, in place.
A number of speakers, including the noble Lords, Lord Tope and Lord Grantley, and the noble Baroness, Lady Carnegy of Lour, will understand me when I say that at the moment we cannot reveal anything about the extent of the subsidy. After all, a commercial transaction is taking place and it would be quite wrong to reveal what the subsidy might be until those negotiations have been completed and the winner of the bidding process has been announced.
1278 Several noble Lords from all sides of the House asked about whether the proceeds of the sale can be used for higher education purposes. Again, as I made clear in my opening speech, the proceeds of the sale will be used to fill a hole in the PSBR which was left by the previous government. We shall however continue to work to make available additional funding for higher education based on our new proposals that we shall discuss next week. I hope that I shall be able to say a little more about it at that time.
The noble Lord, Lord Walton of Detchant, and the noble Baroness, Lady Maddock, asked about the treatment of student loans in the national accounts. The noble Lord, Lord Walton, was right to stress that the Dearing Committee recommended that the Government should examine alternative approaches to national accounting which did not treat loans in the same way as grants to students. We are actively exploring the issue of the treatment of student loans in the public accounts with the Treasury whose responsibility it is. However, any changes to existing accounting treatment would be required to be considered in the broader economic context.
The noble Lords, Lord Walton and Lord Baker, together with other noble Lords, referred to the collection of loans through the Inland Revenue. I am grateful for their support for our decision to collect the loans by this means. This Bill is not relevant to the collection of loans under the new scheme, but that can be discussed further next week. We believe that it is absolutely right and that it is the most efficient and effective way of collecting these loans. Pre-Dearing loans will continue to be collected on the existing mortgage-style basis, not through the Inland Revenue. I believe that that clarifies the relationship between this Bill and later legislation. I believe that it would be wrong to do anything other than this. Students understood the basis on which their existing mortgage-style loans would be repaid and it would not be right to change those arrangements retrospectively. All existing students will continue with their pre-Dearing mortgage-style loans. To allow existing students to have a mix of mortgage-style and new income-contingent loans would be extremely complex, cumbersome and difficult to administer.
The noble Lord, Lord Grantley, asked a number of questions about the interest rate. The interest rate is tied to inflation to ensure that the value of the loan is maintained in line with the provision laid down in the Education (Student Loans) Act 1990. It would not be possible to make such a change under this Bill. Loans were taken out by students on the basis that interest rates would be linked to inflation. One cannot change that retrospectively. In future, key terms will be set out in the loan agreement rather than in regulations. The independent assessor will continue to administer complaints as now. His terms of reference and the conditions under which he operates—for example, his conditions of appointment—are available in the Library of the House of Lords if the noble Lord, Lord Grantley, wishes to pursue the matter. I assure him that no civil servants are involved in the administration of these complaints.
1279 The noble Baroness, Lady Carnegy, asked about the use of the Student Loans Company as collector. If the debt purchaser is to take on the risk of the loans defaulting it must be free to choose the body that collects the loans. The debt purchaser is likely to choose the Student Loans Company because of its experience, but it will take its decision on the basis of its view of the cost of using the Student Loans Company and its efficiency.
I say to the noble Lord, Lord Tope, that the Government's adviser, Rothschilds bank, announced in the middle of last month the four short-listed bidders for the purchase of the student loan debt. That is already available.
The noble Baroness, Lady Blatch, asked several questions. At the beginning she said that she would resist the temptation to speak on next week's Bill. I am afraid that once or twice the temptation proved a little too much for her. I hope that she will forgive me if I do not go into details about next week, other than to say that I shall make available to her a copy of the letter which the Secretary of State has sent to all prospective students. I shall also make available to her the leaflets produced by the Department for Education and Employment to provide potential students who are interested in applying for places at university next year with details of the new scheme. I shall ensure that copies of both documents are placed in the Library and that the noble Baroness and the noble Lord, Lord Tope, who speaks for the Liberal Democrats in this matter, have copies of them.
The noble Baroness also asked whether, following the comments made by the noble Lord, Lord Tope, this Bill would be repealed. Yes, it will. This Bill relates to the existing student loan debt, not to a totally new system that will come into force when the Bill to be debated next week is enacted. The noble Baroness also asked when the last loan payment under the existing system would be made to students. The new scheme will be introduced for new students in October but all existing students will continue to have their loans paid under the present system.
§ Baroness Blatch
My Lords, I am grateful to the Minister for giving way. A question arises from what the noble Baroness said. What is the legal authority for the purchasing company to continue its work to recover the debt some years into the future of those who take out loans under the present system if that legal authority is removed by the repeal of this Bill in the next few weeks?
§ Baroness Blackstone
My Lords, this Bill will not repeal the role of the Student Loans Company in continuing to collect debt under the existing scheme. However, perhaps I may seek to clarify it further in writing for the noble Baroness.
I have tried to answer as many questions as I have been able in the time available to me. I have gone beyond my time. This Bill is a straightforward measure. It is about carrying forward the previous Government's 1280 policy to meet our key manifesto commitment to stick to the already announced spending plans. The receipts from the debt sale will ensure that we achieve this. Education is our key priority. The Bill will extend opportunities and ensure that we continue to make high quality provision, as was the policy of the previous Government. I look forward to the Opposition's support of the Bill at this and further debates in the House. I commend the Bill to the House.
On Question, Bill read a second time, and committed to a Committee of the Whole House.