I welcome you back to the Committee, Mr. Gale. I thank the Minister and the usual channels for allowing us to begin the afternoon sitting by briefly discussing bankruptcy. Although I hope that the debate will be short, it is an important issue to consider. From the outset, I say that this is a probing amendment and we will not ask the Committee to divide on it. I hope that we will receive a satisfactory response from the Minister.
The reason behind the amendment and for raising the issue of bankruptcy is that the whole Committee would agree that, whatever way we dress it up, future students will leave university with significantly more debt. We can call it an investment, but the reality is that, as far as the usual terms of financial prudence and credit worthiness are concerned, students will have significantly more debt.
We must recognise that, since 1992, the number of students filing for bankruptcy has significantly increased. In 1992, eight students filed for bankruptcy. By 1997, that figure had reached 77. By 2002, it had reached 276, and the latest available figures for 2002-03 show that the number has jumped to 899. There has been a huge growth in the number of students filing for bankruptcy over the last few years, and in particular in the last financial year.
The maximum that a student can borrow from the Student Loans Company is roughly £12,000, but under the proposals, that will rise to £19,650. That is a significant jump, and I am not including other debts that a student might have, which might increase with their debt portfolio. However, there is no evidence, despite the rapid increase in bankruptcy over recent years, that there are widespread plans for students to file for bankruptcy. There are roughly 1.8 million students in the system, of which 1.1 million are full time, and most of them take out some sort of loan. The fact that only a relatively small number of students file
for bankruptcy is an indication that this is not a massive problem for the state to consider. Nevertheless, it is a problem all the same.
''Graduates should not see bankruptcy as an easy route to repaying the money they have borrowed through the generously subsidised student loans system.''—[Official Report, 15 May 2003; Vol. 405, c. 13WS.]
I agree with what she said, but she is fundamentally wrong to suggest that students see bankruptcy as an easy way out of their debt problems. The reality is that students have significant debts. I say that because the penalties for filing for bankruptcy are significant, and the Committee should not run away with the idea that it is an easy decision for anyone to file for bankruptcy, particularly someone starting out on their career. It affects not only a graduate's credit worthiness, but their employment opportunities. It would preclude them from becoming a solicitor, chartered accountant, accredited accountant, architect, stockbroker, surveyor, and valuer for an auctioneer and from entering many other professions.
A discharged bankrupt can become an MP, but, as always, the hon. Gentleman makes a serious point, and we may return to it.
There is a pragmatic issue to address, but there is also a fundamental principle. In 2002, following the Teaching and Higher Education Act 1998, the Insolvency Service considered whether students should be allowed to file for bankruptcy. It decided that students should have all their debts written off if they filed for bankruptcy. Sections 251 and 252 of the Enterprise Act 2002 abolished Crown preference for the Inland Revenue and Customs and Excise by not allowing them to be preferential creditors for either company or individual bankruptcies. It is important that the Minister addresses that specific point.
The 2002 Act was not taken lightly by the Government, and the philosophy behind it was that bankruptcy should not be seen as a damning indictment of an individual's ability or business prospects but, as the Americans see it, as part of a journey. The 2002 Act made it clear that the traditional Crown preference for the Inland Revenue and Customs and Excise should be set aside. The Government did that not only for British law, but to come into line with much of European and worldwide law. Australia is often cited as an example of where the new student loan and top-up fee system has been successfully introduced. A significant number of its students have very high debts, and many file for bankruptcy, but the Australian state has been deliberately excluded from being a preferential creditor.
What is the justification for suddenly taking students out of the bankruptcy arena? They are being told that if they file for bankruptcy in future, they will have to retain any debt to the Student Loans Company
and carry it forward to when they are discharged from bankruptcy. They will not have to take forward other debts, even those owed to people who were forced into bankruptcy as a result, something which often happens with small companies that have several unsecured loans. Will the Minister respond to that important issue?
The Government seem to be viewing students through the eyes of the right hon. Member for Barking, who is now the Minister for Children. She believes that students will leave university owing money to the Student Loans Company, file for bankruptcy in a cavalier fashion, go off round the world for a couple of years and eventually come back when all will be well. I do not believe that that is true, but it also belies the fact that the sort of debts that students will have in future will stay with them for a significant number of years.
All members of the Committee would accept that young graduates are unlikely to stay in the same job or career over the 25 years that their debt would stay with them. They are likely to move about. They are also far more likely to be self-employed than any other group of graduates in the history of our university system. It might be 10 years after they leave university, when they have started a business or been part of a business that they get into financial difficulties and want to file for bankruptcy. Are we saying that when people in their mid-30s get into that position and file for bankruptcy, they should be left with a significant debt to the Student Loans Company as a preferential creditor? That is fundamentally wrong.
My final point concerns the student debt portfolio itself. In 1997, when the Labour Government came into office, they inherited from their predecessors a provision to sell the student debt portfolio into the private sector. Hon. Members will know that one of the first pieces of legislation that the Government had to put forward was a Bill to sell the debt. It was unsuccessful, but it was part and parcel of Government policy to do that. It may be Government policy in future to sell all or part of the student debt portfolio into the private sector. In those circumstances, would a private bank that had bought the debt from the Government be a preferential creditor under the Bill? If so, it would put it in a very different situation to any other debt of any other individual or any other company in the United Kingdom. They are serious issues and I hope that the Minister can respond.
The hon. Gentleman has raised some important issues that should be aired in Committee. The Government's view should be set clearly on the record. I have a series of points that I would like to raise, and I hope that the Minister will address them. I share the hon. Gentleman's view that bankruptcy is a very serious step to take. Despite the reports of web-based communications going around the student cohorts saying that the best way to get out of fees is to file for bankruptcy, I do not seriously believe that, with the
possible exception of a small number of graduates on the fringe, large numbers of graduates will declare themselves bankrupt just to get out of their student fees. The consequence of doing so for their professional lives would be immense.
The fact that the issue even arises reinforces the fact that many students feel intimidated by the debt burden that they are building up through both the existing system and to a much greater extent through the system that the Government propose. I hope that the Minister will not seek to portray this measure, whether right or wrong, as being simply a response to a tide among students of using bankruptcy as a way to get out of repaying their debts. I do not believe that most serious graduates would consider such as route.
There are two key considerations. One is the financial process that students or graduates will go through in the case of bankruptcy. The second concerns the Government's involvement as an active or passive creditor. Will the Minister give us his views on that?
On the process, if a student or graduate had, for whatever reason, reached the point of having to be declared voluntarily or involuntarily bankrupt, the individual would be subject to the regime of the insolvency courts and his finances would be tied up in the courts. The Insolvency Service, the relevant officer of the Crown or an officer of the court would set parameters for managing that individual's finances. Bank accounts would be frozen and so on, and he would be given a small amount of money to live on. That is the normal process for such cases.
However, at the same time, the clock would be ticking. Labour Members sometimes do not fully understand that the student loan structure is not about paying when possible, but about a deferred interest process. The interest rate this year is 3.1 per cent. Interest continues to accrue each month of each year that goes by, whether the individual is a student, a graduate earning less than the threshold, a graduate who has given up to take a career break, or a graduate who has gone bankrupt.
The hon. Gentleman made that point before. The only rate of interest applied is for the cost of living. It is equivalent to the retail prices index so that the loan holds its original value. Does he accept that, or is he under the misconception that another rate of interest applies? If he does accept that, does he further accept that it is perfectly reasonable for us to ensure that the value of the original loan is maintained, without adding any extra burden, which a real rate of interest would do?
The Minister misses the point. I fully accept that the Government currently charge a rate of interest that is equivalent to the RPI, but it is still a rate of interest. Each student or graduate with a student loan will make an interest payment of 3.1 per cent. on that debt this year. That is lower than commercial rates, but two-year fixed-rate mortgages are available at 4 per cent. That is not a massive difference. Whether
it is 2 per cent., 2.5 per cent. or 3.1 per cent.—the rates of inflation in recent years—it is still a fact that each year that a repayment is not made to the Exchequer, interest accrues on the loan and is added to the total.
If someone is bankrupt, he may not be able to make his repayments. Not only will he not have the resources to do that, but the law will preclude him from doing so. In that case, money accrues on the overall debt level while someone is bankrupt.
I am trying to follow the hon. Gentleman's logic. Is he suggesting that if there is a period of years within which the debt is not repaid, the inflation interest is compounded and the sum due is greater when the person is in employment and starts making repayments?
Let us look at that in practical terms. Suppose someone goes bankrupt with, for example, a debt of £10,000, which is about half the maximum debt expected under the Government's proposals. Let us assume that the Government are charging interest on that loan at the rate that applies this year. If that person is bankrupt for three years and unable to make the repayments, £310 in interest will be added to the loan in the first year and it will become £10,310. In the second year, another 3.1 per cent. will be charged and just over £310 will be added, so the loan will become £10,600 and a bit. The same will happen in the third year, after which the person will end up with a debt of about £11,000. Therefore, the debt does not simply stay at £10,000 until the person can afford to repay it; it increases year by year as the interest is deferred and rolled up. The graduate will be constrained by the courts from making any payments, but the debt will rise accordingly.
Is it the Government's intention that the debt on the loan simply carries on accruing until a person emerges from bankruptcy, goes back into the employment market, gets back on their feet and starts making repayments? From their point of view, the bankruptcy will, de facto, never have happened. If that is the Government's intention, what role will they take during bankruptcy proceedings? That relates very much to the point made by the hon. Member for Harrogate and Knaresborough (Mr. Willis).
If, in law, the debt simply continues, the Government will have no place as a creditor. When an individual's assets are put into the pot to be divided among the creditors, the Government's involvement would be irrelevant, and one assumes that they would not seek to participate. If they did, they would have their cake and eat it because they would have the comfort of knowing that they alone among the creditors were pretty much guaranteed of getting their money back over the 25-year period to be prescribed in the student loan regulations that they introduce. On that basis, they would face no risk. On that basis, one assumes that they would not seek to be an active participant in the bankruptcy process. If they were, they would have to recover money at the expense of other creditors, despite having a guarantee that they
would get their money back anyway. It is important that the Government address those issues and explain how they see their role.
The hon. Gentleman refers to the Government benefiting ahead of other creditors, but what is to prevent a graduate from taking out a few loans or using credit cards—people's credit limits are raised with amazing speed—to pay off their student loan and then declare themselves bankrupt? That would be perfectly straightforward. In that situation, the Government would benefit at the expense of other creditors.
The hon. Gentleman is right that there is nothing to prevent an individual from doing that, but the downside is that their credit ratings would be destroyed for the foreseeable future and their professional career would be massively undermined. They would pay a pretty heavy price for a short-term measure to remove their student debt. It would be wrong to say that no one would be tempted to do that, but I doubt that many smart graduates would see that as a sensible way of building financial prosperity. That is not how I see the Government benefiting from other creditors.
Let us imagine that someone goes bankrupt owing the Minister and the Government £10,000 each. Normally, if the Government came in as an active creditor, both creditors would get half—they would both get £5,000 of their £10,000. Under the Bill, however, the Government are guaranteed to get their money back later. It would be perfectly possible, therefore, for the insolvency courts to give the Minister all his £10,000 so that he was not out of pocket. The Government would get everything back when the person was out of bankruptcy. It is logical, and a natural extension of what the Government are saying, that they would not seek to be an active creditor in such situations and would not seek to jump in and get their half of the £10,000—their £5,000. They would ensure that the other creditors did not lose out because they had the guarantee that they would be able to recover their money at a later date when that person was discharged from bankruptcy.
I should be grateful for the Minister's clarification of that because, while I understand the rationale behind the measure, the Government should not be able to have their cake and eat it and establish themselves in the position where they get their money back regardless, at the expense of—
Well, I do not believe that the Government should introduce measures that allow them to get their money back in all circumstances and then take money back from the creditors' pot as well. They need to clarify and explain that.
It is a delight to get back on my feet after a month of sitting in the Committee. There has certainly been a process of ageing. At the beginning of our proceedings, my hon.
Friend the Member for Stalybridge and Hyde (James Purnell) was 33; he is now 34. I was 36 and I am now 37. It has obviously been a difficult and stressful time.
I am delighted to have the opportunity to respond. It is important to recognise that young people making choices and examining bankruptcy as an option is not a minor matter or a joke, but a serious issue. It is indicative that the National Union of Students has made it clear to students and graduates that it does not regard opting for the bankruptcy route as a sensible decision because of its consequences, as outlined by the hon. Member for Harrogate and Knaresborough.
However, it is also important not to exaggerate the number of students choosing that option. Less than 1 per cent. of student loan borrowers go down the bankruptcy route. The irony is that the income-contingent nature of the system of student support that the Government propose minimises the dangers to graduates of financial indebtedness over a period of time.
On the figure of less than 1 per cent., the Minister will be aware that at current levels 1 per cent. of the student loan book is approximately £120 million. That is not an insignificant sum. Will he clarify the figure of less than 1 per cent? Are we talking about massively less than 1 per cent. or something close to £120 million?
Of the people who take out student loans, less than 1 per cent. of that cohort find themselves in a bankruptcy situation. There was an increase within the past year, which I think most people accept was largely connected with the publicity on the option of using bankruptcy as a way of not paying student loans. A particular issue arose and it received a tremendous amount of publicity. There was such a dramatic increase in those 12 months that it is reasonable to link it to the attention that was focused on the issue and the ensuing greater awareness of that option. The figures are 2,400 bankrupts and 2 million borrowers. I hope that that gives the hon. Member for Epsom and Ewell (Chris Grayling) a clearer idea of the numbers involved.
The decisions that we make on bankruptcy are a matter of principle. There are a range of reasons why it is appropriate to remove student loans from the bankruptcy process. It would be wrong to allow a small minority of graduates to evade responsibilities that are accepted by the majority. I expect that all members of the Committee will accept that the vast majority of graduates would regard it as their responsibility to pay the loan back. We should do nothing to support the small minority who might choose not to fulfil those responsibilities.
Bearing in mind the damage that can be caused to an individual's life chances by bankruptcy, it is right to remove any perceived incentive that would encourage students or graduates to make that choice. When we speak of the Government's role—Conservatives Members are usually good at making this point—we
mean protecting the interests of the taxpayer. Whatever legislative framework we use, we should ensure that we behave responsibly in protecting the public interest—and in this case, public money.
We should remember that, despite the hon. Gentleman's observations, the student loan has an incredibly favourable rate of interest. No one can dispute that. It is nowhere near a commercial rate. Graduates will not find themselves facing bankruptcy because of their student liabilities, because the repayments are income contingent. Indeed, under the new proposals, graduates will begin to pay back only when they are earning £15,000 a year, and outstanding liabilities will be written off after 25 years. A series of principled and practical reasons make it appropriate to remove student loans from the bankruptcy regime.
As for the amendment, the fact is that we have no desire for the Government to become a preferential creditor. The clause takes student liabilities out of the bankruptcy framework. If we designated the Government a preferential creditor, the hon. Member for Harrogate and Knaresborough would have a valid point; but removal from the framework means that more non-governmental creditors are likely to benefit than if we did what he suggests. I suspect, in any case, that his amendment was probing.
The hon. Gentleman spoke about the Enterprise Act. One of the central aims of that Act is to free more money for ordinary creditors in bankruptcy cases. As I said, taking student loan debt out of the equation reinforces that view.
Will the Minister confirm a point raised by the hon. Member for Epsom and Ewell, which is that in the event of graduates going bankrupt who had some assets available for redistribution to creditors, the Student Loans Company would never be a creditor, and that they would not be discharged from bankruptcy even if money owing to it had been repaid?
No. The purpose of the clause is to remove the student loan from the bankruptcy framework. The student loan will be related entirely to a graduate's income under the income contingent scheme. The status quo is that the student loan is part of the bankruptcy framework. In many ways, that was an unintended consequence of legislation enacted by successive Governments. However, because of issues raised in the past 12 to 18 months, the Government became aware of the implications. We want to change that legislation through the Bill, thereby entirely removing that set of circumstances from the bankruptcy framework. That would also reinforce the point that the Government cannot be a preferred creditor in such circumstances, because that is not part of the bankruptcy framework and we have no intention of making it so.
The hon. Gentleman also raised the historical question of selling off debt. That happened with the old mortgage-style student loan debt, which was sold in 1998 and 1999, but there are no plans to sell any more student loan debt to the private sector. In any
case, the terms and conditions of the loan are preserved by the sale agreement. Despite what he said about that, there are genuinely no risks or concerns.
The Minister seems to be using a sledgehammer to crack a nut. First, perhaps he will tell us about any other instance where something cannot be dealt with by bankruptcy proceedings. What other debt, and which other Department or private sector creditor, can be faced with that? Is this a unique, pioneering example in the bankruptcy world? Secondly, will he tell us whether there have been discussions with the Department of Trade and Industry? I understand that it is probably responsible for bankruptcy law.
I can respond directly to my hon. Friend and give some specific examples. On secured creditors against their security, for example, a debt to a building society can be extinguished in relation to a mortgage, but the building society's right to equity on the property is not affected. Other examples are debt incurred through fraud, fines imposed for offences or confiscation orders, or liabilities to the court, such as bail bonds, and liability to pay damages for negligence, nuisance, breach of duty or personal injury. Those are all items that are not included—and would not be possible to include—as part of the bankruptcy framework.
On consultation with the DTI, my hon. Friend knows only too well that joined-up Government is a reality. If he believes that—[Interruption.] It was ever thus under the previous Government. I assure him that consultation with all relevant Departments took place before we made the judgment that this is an appropriate measure.
I should like to respond to the comments made by the hon. Member for Epsom and Ewell—at least, those that I understood. The student loan balance would remain during bankruptcy. Interest rates accrue at RPI to maintain the same value in real terms. In the previous year that was 1.3 per cent., and next year it should be less than 3.1 per cent. As my right hon. Friend the Minister of State said, without RPI interest the loan would lose value in real terms. When the graduate repays the loan, they repay only the value in real terms. That is a reasonable, logical and appropriate way to protect public resources and funds.
There is one further thing about which I am a bit confused. Perhaps an individual has debts in the private sector and another debt to the student loan body. If the private sector debt is comparatively smaller, and the assets would be sufficient to cover that, but not his total debts, does the Bill mean that he could not become bankrupt, because the debt to the student loan body would be discounted?
As far as I know, that would not be the case, but I am happy to the write to the hon. Gentleman on that issue if that would be helpful.
To clarify what I am pretty sure the Under-Secretary said, is it the case that Governments will no longer seek to recover capital from student loan debt from the pots of money that the official receiver recovers when somebody goes bankrupt? In other words, the Government will not seek to be one of the creditors who recover money during that process.
That is entirely the purpose of the clause. The issue is important, not minor, but the whole debate is sometimes deliberately contrived to give the impression that the student finance regime that we propose will have a punitive impact on graduates. It is important to cite some hard facts. A graduate earning £20,000 a year will repay only £450 a year, which is £8.60 a week. That is the impact of the income-contingent student finance regime that we propose. The idea that the changes that we are making will increase the risk of bankruptcy for graduates is absolutely untrue. With that, I would ask the hon. Member for Harrogate and Knaresborough to withdraw the amendment.
I thank the Under-Secretary most sincerely for his response. People reading the Committee Hansard will find his comments very interesting indeed. The Government have said today that the Bill will totally change the situation with regard to an individual's debt and credit worthiness. We now have a new term, ''permanent deferred creditor'', to describe what a graduate's loans will result in.
The Government have also said that although the finance company and those assessing a graduate's overall credit worthiness will have to take a debt to the Student Loans Company into consideration, in fact, bankruptcy will not be part of that. The Under-Secretary is right. One of the reasons for the amendment was to secure from the Government an understanding that under the clause a student's debts will be totally separate in case of bankruptcy. The debt will sail on, irrespective of whether a person goes bankrupt. That will create a unique situation in British law.
Does the hon. Gentleman believe that it would be responsible of any Government to tell the vast majority of graduates who fulfil their responsibilities, as is appropriate, that it is absolutely fine for the debt of the small minority who do not to be written off when bankruptcy occurs?
The Under-Secretary cannot have his cake and eat it. I totally agree with him. In fact, I said in my opening remarks that I did not believe that students simply filed for bankruptcy for a laugh or because it was a cool way to get out of debt. By the way, the figures that the Under-Secretary cited were totally different from those that the Minister of State gave me in a parliamentary answer in February.
Well, they have changed quickly from 899 to more than 2,000. That is an astonishing change in less than a month in the number of people filing for
bankruptcy. Also, I hope that my remarks at no time suggested that I was deliberately encouraging students to file for bankruptcy.
Why is it right that the plumber who puts in a new gas fire for a graduate in their home should do without any recompense at all when that graduate goes bankrupt, but it is okay for the debt to the Student Loan Company to continue ad infinitum? It might be right for the taxpayer, I accept that, but why is it not right for the individual business man to be in a similar situation?
Can I test the hon. Gentleman on the matter? There is nothing between either party about loans. As far as I know, the policy of the Liberal Democrats and the Conservatives is not to do away with income-contingent loans and go back to a universal grant.
Does the hon. Gentleman accept that the unique factor is the income-contingent repayment? When it was introduced in 1998, everybody involved with the original legislation understood that this was exactly the kind of situation that would arise because of the income-contingent nature of the repayment. If one is not earning above the threshold, one does not make a payment; if one is, one makes a payment. It should therefore be kept completely out of the bankruptcy situation. I know that he had some involvement with the original legislation. Does he not accept that that was the original intention and that everyone involved when income contingency was introduced felt that that was the situation, until the debate in the Lords on the Enterprise Act revealed that unbeknown to anybody there was a flaw?
I fully accept what the Minister says. As we sat through those debates on the original legislation, I do not think that any of us contemplated a situation whereby students deliberately filed for bankruptcy to get out of paying back their debts. The point that I made to both the Minister and the Under-Secretary is that the number of students who actually do that is very small indeed, by the Minister's own admission. I accept the point that the Minister rightly made that, given the mass publicity that followed the Lords debate in 2002, people were encouraged—frivolously, and quite wrongly in my view—to file for bankruptcy.
I will obviously reflect on what the Minister says and on the debate—that is why this is a probing amendment. However, I do not believe that the situation is so big that we should say to any individual who is likely to be a self-employed business person in the future that if they file for bankruptcy, and find themselves in such a serious situation, they should come back after bankruptcy to find that they still have their student loan, even though it is repayable—I fully
accept that—on an income-contingent basis. That was the basis of the probing amendment, and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 39 ordered to stand part of the Bill.