Education Bill

My Lords, Clause 72 amends the powers given to the Secretary of State in the Teaching and Higher Education Act 1998 to make regulations setting interest rates for student loans. As the legislation currently stands, Section 22 of the 1998 Act effectively provides that the interest rates set must be no higher than the rate required to maintain the value of the loan in real terms. So the fee and maintenance loans of students who study at English universities attract interest while individuals are students and when they graduate. This is charged in line with a predetermined measure of inflation, and if no repayments are made, the size of the loan increases in cash terms but remains fixed in value terms. This means that the value of the money borrowed by students has the same value as the money we paid. Clause 72 gives the Secretary of State wide and substantial powers to set interest rates. But its intention is to move the policy of the Government away from where it was, and from where its independent adviser, the noble Lord, Lord Browne of Madingley, recommended it should stay, away from zero rates of real interest to where the real interest rate would be three per cent above RPI. The Bill provides the Secretary of State with the power to introduce a positive, real rate of interest in addition to maintaining the value of fee and maintenance loans. Depending on the size of the loan, the real rate of interest charged in excess of RPI, and the movement in salary levels in the period to 2016, more graduates than at present are likely to find that they do not pay off their loans in full in spite of the apparently higher salary threshold. The extension of the repayment period to 30 years compounds the problem, and it was no surprise to hear the Deputy Prime Minister, no less, state that up to 60 per cent of graduates are not expected to repay their loans in future. This has obvious consequences, not only for the individual, but for the taxpayer. So, let us look at this seemingly innocuous proposal in more detail. Why was RPI selected? Is it not the case that the Government’s preferred measure in inflation is CPI? CPI is now used for the Bank of England’s inflation target, for measuring inflation, for pension calculations, and for most salary and other uplifts. RPI was said last month to be running at about 1 per cent higher than CPI, because it includes housing costs. I suspect that mortgage and other housing costs do not feature in many of the budgets of students taking out these loans. So what is the logic for using RPI and not CPI? I would be interested to hear what the Minister says about this. The Government’s choice of RPI will cost the student more, but will bring in more for the Treasury, when and if the loan is repaid, and in the interim, of course, it helps the department to stay within its budget. I will return to this point later. As I am sure I do not need to remind the Committee, without the ability to charge such penal rates of interest as are provided for in this clause, the impact of the new loans policy would have put an intolerable strain on public finances. The cost of public funds is the face value of the loans in any one year, less the present value of future repayments. If the fees are higher, the loans will be higher, and if the interest rates are 3 per cent or more above base, the PV of future payments goes up, and the department’s bacon is saved. But is it fair for future generations of students to be charged at this exorbitant rate just because the department got its sums wrong? My second point is the impact on social inclusion. If the rate of interest charged is in fact 3 per cent above RPI, that would result in interest rates at the moment of about 8.2 per cent per year. These are eye-wateringly high figures. We take the view that the move to impose a real rate of interest is not progressive, and that it will act as a barrier for bright kids from poorer backgrounds contemplating going to university. It may also impact on diversity and equality issues. Is this really fair? One particular aspect of this is the question of whether such penal rates of interest are Sharia-compliant. Sharia law prohibits riba, which means the paying and receiving of interest for profit. At present, even the inflation-only interest that is paid out on student loans for undergraduates is seen as riba, although there are many Islamic scholars who do not see it this way. A spokesman for the Department for Education and Skills quoted in an article in the Guardian in April 2004 said, "““We appreciate the Muslim position on borrowing. But, it is important to remember that student loans do not incur a real rate of interest and the government does not make any profit out of these loans””." This is April 2004. "““Student loans do not incur a real rate of interest””." How interesting. But for new students starting higher education in 2012, a real rate of interest is to be charged. Presumably more than a few Islamic scholars will now come to the view that such a system is not Sharia compliant, and many Muslim students may be deterred from applying to university. I assume the Government considered this point very carefully before introducing this measure, and I understand that the Government are currently working with various Islamic groups to discuss the issue. On 19 July 2007, the Minister of State for Universities and Science confirmed in the other place that he had met with the NUS and the Federation of Student Islamic Societies to discuss this issue. Will the Minister update us on this, because it is a very important point? My third point is that there seems to be no justification for the figure of 3 per cent. The Committee will recall that the independent Browne report on higher education recommended that, if fees were to rise, there should be a safeguard to ensure that those making no, or relatively small, repayments did not see the balance of their loan increase in real terms. The Browne report recommended that the interest rate should be set at the rate that the Government can borrow money. He calculated that this would be about 2.2 per cent at the time he submitted his report. Again, our students are being penalised, with the amount that they are having to borrow rising at a rate not only higher than CPI or RPI inflation, but 0.8 per cent higher than it ought to be to preserve the cost of what they are borrowing. Our amendment would have the affect of reinstating what the noble Lord, Lord Browne, recommended, which we think is fair. My last point is the apparent rise in the salary threshold, which determines when a graduate has to start repaying his or her loans. I say ““apparent”” because, when this new threshold kicks in, it kicks in for loans taken out in the session 2012-13 so that the figure has to be deflated using RPI in the period to April 2016. My calculator broke down when I was trying to do this calculation before I came upstairs and it is why I was slightly late for the start of the Committee, for which I apologise. I came out with a figure of about £15,000. I am sure that officials will be able to check that quickly and give the Minister the figure to rebut it if it is true. But, even if it is not close to it, it is a lot less than £21,500 and remarkably close to the current threshold. Anyway, my point is that, deflating to today’s figures, does not represent a significant increase at which point the interest repayment trigger is activated. Before he was reshuffled, the noble Lord, Lord Henley, very kindly wrote to me last month about these amendments. I am grateful to him for doing so. He set out why the Government have acted in the way that they have. No doubt his successor will share these comments with us later in this debate. However, in his letter, the noble Lord, Lord Henley, gave the game away. He said: "““Imposing a cap on the interest charged to borrowers would make it very difficult for the Government to budget for the cost of issuing loans and is likely to make the system unaffordable for the taxpayer.””" I do not really understand the point about making it difficult to budget—unless this has to do with the mess the department are clearly in over the overall costs for this scheme. But we are left with a real reason. The Government have to put a 3 per cent limit on top of RPI because they need, in some ways, to pay for it and reassure the public about the overall costs. So, the Government have to use RPI, not CPI. They have to charge more than the Browne report recommends. They have to amend the current legislation because they have to cover the cost of issuing loans and because there is a limit to what the country will stand for. Although my party commissioned the Browne report while we were in power, we did not have to make the decisions that arose from the report’s recommendations. Therefore, it is easy for us to say that we would not have done it this way. But this proposal to impose penal interest rates is surely not fair and cannot be in the best interests of this country’s future students. The impact of a positive real rate of interest will be significant and will lead to graduates paying more for their higher education and repaying for longer than at present. Using RPI instead of CPI is wrong and taking powers to impose rates of up to three percentage points above RPI is penalising our young people and their families. It will exacerbate social divisions and it may deter young Muslim applicants. It will generate a high level of debt that will have to be repaid over a period of 25 or 30 years as a contingent tax liability. A positive real rate of interest will impact in particular on the repayments made by mature students. Getting behind the figures, we find that there has been no increase in the salary threshold, so only the term has changed. However, as a result of that, many more graduates are likely to reach the end of the repayment period without paying off their loans—and I understand that these typically will be of the order of £45,000 at the end of a three-year course. It is also likely to have an inadvertent impact on female graduates and on men at the bottom decile of earnings. I am afraid that it is beginning to sound like a bad deal all round. It will set up a lifelong debt and borrowing habit that some people will take to their graves—a new form of the term mortgage. If this clause stays in the Bill, it should be seen for what it is: deeply unfair and divisive. It is not progressive. Indeed, it is easier to see it as part of the narrative of readying the Student Loans Company for sale as well as depressing demand for higher education than about cutting public expenditure. Our amendment would at least restore the status quo. I beg to move.