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

Part of the debate – in the House of Lords at 5:06 pm on 16th January 2019.

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Photo of Baroness Bowles of Berkhamsted Baroness Bowles of Berkhamsted Liberal Democrat 5:06 pm, 16th January 2019

My Lords, this was an amazing inquiry to be part of. In particular, it was amazing to visit the students and apprentices, and I came away thinking, “I want to go round again”. But as we all know, we are not necessarily providing the right kind of people. As a shortcut, I will identify with everything the noble Baroness, Lady Harding, just said. At the end she also provided the answer to the first question from the noble Lord, Lord Willetts, about what we meant in the introduction. We were not saying that universities were a bad thing but that the concentration on the honours degree has sucked away from everything else.

I will, alas, return to the nerdy issue of the national accounting treatment of student loans, and will perhaps fill in a little more of the character around the issue. The UK’s design of student loans is unusual, in particular because it is designed so that a part of it will definitely be written off. It is therefore not all a loan. Payments are made only above a certain threshold, which I think is now £25,000, but the intention is that in order for some redistribution to happen, the more you earn, the higher the interest rate charged. It starts at the lower end at RPI, but by the time you earn £41,000, it is RPI plus 3%, which seems to be quite a sting, getting over 6%. In chapter 8 of the report we explain how the redistribution does not work in practice and how it tends to hit those most who do not quite manage to pay off the loan and get stuck with it for the full 30 years, whereas higher earners get it paid off quicker and do not pay the interest for quite so long.

Because of that fact of getting stuck with a loan for 30 years, we did not think that an extension to its term would help anybody. That comes to the heart of the second point raised by the noble Lord, Lord Willetts. Those same people who are already hit the most would be the ones hit for another five years or so, so we tackled this a different way round and said that you should not start accruing the interest while you are still an undergraduate. To add it on over those three years on the full amount is a big hit right at the beginning, which then rolls up over those years. The other egg in our basket was to reduce the loan rate.

The state of student loans, the loan book and how much is likely to be repaid is published by the DfE. The calculations are complicated, but are not a secret and the analysts who look at national systems of accounts know about them. However, the amount that is not expected to be repaid does not appear in the national deficit calculation until it is written off, and that has a flattering effect. That is what I call IFRS—the accounting standard for countries. Anyone who knows me will know that for me to say that is not complimentary.

Dr Andrew McGettigan, an expert on higher education policy, questioned whether it was reasonable for the transaction to be treated entirely as a loan, because it is not, and therefore whether we should do something about the accounting with regard to the expectation of what is and is not going to be repaid. In its evidence to us, the ONS said that it had no choice, that:

“ESA [20]10 is an international standard […] there are some snakes and ladders in the system”— a good description of IFRS—and that you,

“must follow them and you cannot pick and choose when you do and when you do not”.

Unfortunately, this was a bit of a red rag to a bull because, as has been hinted, I know a little bit about ESA 2010, because I was chair of the committee that took the legislation through the Parliament—in fact, I was also the rapporteur. We looked at all the wizard wheezes that the 28 countries got up to, because what appears in the deficit is very important for eurozone countries. They can go into nasty procedures that do not affect us. We had a great interest in that, and I knew that we had paid attention to what happens when the amount that will not be repaid is on the never-never and is never going to be repaid. So I kind of knew what Eurostat might say, which is on page 109. It was that the accounting treatment switches when more than 50% will not be repaid.

To cut a long story short, the ONS, under the pressure that we put on it, changed the treatment so that it is not now a loan treatment; it is partly spending, partly loan. Otherwise, we might have the absurd situation where as we hover around 50%, we swap between accounting treatments. I do not think that yo-yo would be a good idea. That is what the ONS has done.

The effect of it being included in the deficit is that it is under the Chancellor’s nose and will get looked at. It will be looked at for what it does and what it is worth, not for its accounting treatment, and one should therefore look more favourably on the other recommendations of the report. We have got that one, let us get all the rest.