Education: Treating Students Fairly (Economic Affairs Committee Report) - Motion to Take Note

Part of the debate – in the House of Lords at 3:37 pm on 16th January 2019.

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Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Chair, Economic Affairs Committee, Chair, Finance Bill Sub-Committee 3:37 pm, 16th January 2019

My Lords, it is a pleasure for me to introduce the report of the Economic Affairs Committee, Treating Students Fairly: The Economics of Post-school Education. The Committee set ourselves the following exam question: “Is the current structure of post-school education and training, and the way it is financed, appropriate for the modern British economy?” I fear that our short answer was, “Absolutely not”.

Before I explain our conclusions, I would like to thank our excellent specialist advisers for the inquiry, Professors Nick Barr and Andy Westwood, and the committee staff who produced the report, Ali Day, Ben McNamee and Ayeesha Waller. I have been told that I can speak for 20 minutes but everyone else can speak for only five. This is ridiculous and therefore I intend to keep my remarks rather shorter so that my colleagues can speak for longer, although of course I recognise that the five minutes is only advisory. My fellow members of the committee will take up some of the points I will not cover: my noble friend Lady Harding and the noble Lord, Lord Sharkey, will discuss our findings on part-time education, flexible learning, apprenticeships and maintenance support.

Tony Blair announced in 1999 that he wanted 50% of young people to go into higher education. That has been achieved, but it was achieved almost entirely from more students enrolling on to full-time undergraduate degree programmes—indeed, “higher education” is now synonymous with universities. Higher education is, however, much broader than the three or four-year undergraduate degree. There are thousands of technical and vocational qualifications which can be studied in a variety of higher education institutions and further education colleges, either full-time, part-time or as part of an apprenticeship.

The number of first-time undergraduate degrees awarded in the UK increased from 369,000 to 414,000 between 2010-11 and 2016-17. Over the same period, the number of other undergraduate qualifications at level 4 nearly halved—from 141,000 to 77,000. The number of vocational qualifications at level 4 was virtually unchanged at 130,000 to 134,000.

The crucial question to ask is: has this been in the best interests of students? Our evidence suggested that there is a shortage of workers with technical qualifications, but lots of graduates doing jobs in which their learning has no application. The evidence for this is set out in chapter 2 of our report, from which I will take two examples. The National Audit Office published a report on STEM skills last year, which found an acute shortage of people with vocational qualifications of levels 3 to 5, and an oversupply of people with STEM qualifications at degree level. Estimates of the proportion of graduates currently employed in non-graduate level jobs vary from 25% to 50%.

Some current graduates would undoubtedly have been better off with a technical or vocational qualification, relevant to the workplace, which would have helped them secure a more satisfying job and left them saddled with considerably less student debt. But if that is the case, why in the field of higher education has the undergraduate degree become almost the only game in town?

We put forward a number of reasons. For example, other qualifications are perceived as inferior by students and parents. This is not much helped by schools, which are incentivised to push students towards sixth form and university. In particular, an apprenticeship should be viewed by young people and society as just as valid as the academic route. The Government admitted in their response to our report that more could be done in schools to improve information on post-18 options—I pay tribute to my noble friend Lord Baker for the wonderful work he has done in encouraging vocational and technical education in our schools. Employers are increasingly requiring applicants to hold degrees regardless of the level of skill the job requires.

We believe the main reason comes down to one thing—funding, and, in particular, the funding reforms for higher education that the coalition Government enacted in 2012. Tuition fees rose from £3,000 a year to a basic level of £6,000 a year, with institutions able to charge up to £9,000 a year if they agreed to widen access. Before the reforms, the income of the universities was split roughly half and half between tuition fees and government grant, whereas now the vast majority of university income is from the higher tuition fees. Given that funding therefore follows the student, it is unsurprising that almost all the institutions are charging the maximum permissible amount, which is now £9,250. This does not look like the competitive market the Government said would result from the reforms. The reforms, together with the removal of the cap on undergraduate numbers in 2015-16, have incentivised universities to recruit as many students as possible onto the most expensive undergraduate programmes.

These incentives may explain an area where there does appear to have been competition, albeit unwelcome competition: grade inflation. The Office for Students published a report last month which showed that, in 2016-17, 105 out of 148 institutions had an unexplained increase in the number of first-class degrees they had awarded, relative to expected performance across the sector from 2010-11. In 2016-17, 26% of students received a first-class degree, up from 18% in 2012-13. To take one example—there are many of them—the University of Surrey awarded half of its English-domiciled students a first-class degree in 2016-17, up from 23% in 2010-11.

The committee was not, however, convinced that a more competitive market was the only intention behind the 2012 funding reforms. We believe the changes were motivated mainly by a desire to reduce the deficit. Tuition fees are paid through student loans. Expenditure on student loans does not count as current government spend in the national accounts, unlike the teaching grant, which does. This difference in the accounting treatment meant that George Osborne was able to perform the most extraordinary magic trick, appearing to increase spending by £3 billion in 2012-13, compared to 2011-12, while reducing the deficit by £3.8 billion at the same time as the proportion of funding from tuition fees increased.

This sleight of hand—for that is what it was—was possible despite the fact that a large proportion of student loans will not be paid back. The Institute for Fiscal Studies estimated that around half of the value of student loans issued in 2017-18—around £8 billion—would eventually be written off. These write-offs will of course show up in the deficit only in 30 years’ time, by which point the student loan book, which will have to be written off by the generation who are paying tuition fees and taking out loans, will be an astonishing £1.2 trillion in nominal terms.

The very high interest rates on student loans together with charging it now before even graduation has taken place, from the moment students enter the institution, at a current maximum of 6.3%, was part of a plan to reduce the deficit, despite its presentation by the Government, wrongly, as a progressive measure, since they argued that only high-earning graduates would repay all the interest. I am disappointed to see that, despite our report, Ministers are still saying that this system is progressive. In our report, noble Lords will find an example of a man who goes to work in the City as a lawyer compared to a man who works as a nurse. Who ends up paying more? The nurse—because the very high interest rate compounds, and the people on higher wages pay the loan down more quickly.

Under national accounting rules, the interest on student loans is counted as income as it accrues. The Office for Budget Responsibility said this accrued interest was worth £3 billion in 2017-18 and would rise to £7.5 billion by 2022-23. It said that, as much of the interest will eventually be written off rather than repaid, the national accounting methodology,

“does not reflect fiscal reality”.

That was the Office for Budget Responsibility. The full scale of this fiscal illusion was made apparent by further work it carried out, which was published after our report. It said that, when the write-offs on student loans begin to hit the national accounts in the 2040s, they will be more than offset by the interest accruing on larger loans taken out by later cohorts. It described this as a “pyramid of fiscal illusions” and said that, as long as the student loan system persisted in its current form, it would always flatter the deficit, despite the system barely breaking even in cash terms.

We recommended that, to reflect reality, the write-offs on student loans should be recognised up front. We were pleased to see that the Office for National Statistics has acted upon this recommendation. It said last month that, due to the scale of expected write-offs, student loans did not fully meet the criteria of loans as defined in European accounting rules. The classification of student loans will be changed so that the proportion expected to be written off is treated as a capital transfer rather than a loan. It intends to introduce this change from September this year. The change will also address the accrued interest illusion, as interest will not be charged on the part of the loan that was created as a capital transfer. The interest recorded as government income accrues only on the part of the loan that is expected to be repaid.

This provides a splendid opportunity, in the interests of treating students fairly, of reducing the interest rate to the 10-year gilt rate, at about 1.5%, thus reflecting the Government’s cost of borrowing. The Office for Budget Responsibility estimated that the new accounting approach would have added £12 billion to the deficit in 2018. It was quite a turnaround from the Office for National Statistics, which told us in January last year that student loans met the definition of a loan for national accounting purposes. Its change of heart appears to have been prompted by the committee’s letter to Eurostat, proposed by the noble Baroness, Lady Bowles, who understands these matters. It was Eurostat’s response to us which suggested that student loans did not fully meet the definition of a loan that appeared to stir the Office for National Statistics into action.

Funding for universities, masked by the fiscal illusion, has increased in recent years, but funding for further education has decreased. The Department for Education told us that funding for further education decreased by £1.6 billion from 2014-15 to 2017-18. Further education is, however an important route into higher education for those who do not pursue an academic route, but with low demand for some vocational courses, many colleges are unable to afford the cost of putting courses on. We said that the Government should explore restoring some teaching grant to further education colleges so that they can cover costs and stimulate demand for courses at levels 4 and 5.

With the accounting changes, there will no longer be a false choice between spending in post-school education that registers in the deficit and spending that does not. A proper debate can be had over where public money is best spent. As a starting point, we called for tuition fees to be frozen at £9,250 for the medium term. To assist with the debate on funding, we also recommended a single regulator across all higher education at levels 4 and above and a single regulator for all other post-school education at level 3 and below. The regulator for level 3 and below should have the equivalent status to the Office for Students, with sufficient resources and credibility to champion further education.

Our report is an appeal to the Government to treat students fairly by ensuring equal treatment and sustainable funding for all forms of higher education. This would help to create an even system of post-school education in this country that will support the economy by ensuring that we develop the skills we need and, most importantly, allow all our people to maximise their potential. I beg to move.