Brown's budget bind

Loans sale may fund school vow

The new Labour government will have to plunder money from the sale of student debt to pay for school and nursery pledges. Chancellor Gordon Brown's promise to stick with Conservative budget plans for the next two years has left the Department for Education and Employment little room for manoeuvre.

Changes to loan arrangements offer one of the few chances of extra cash - but only if the Government sells off the student loan company as well as the debt, which is already for sale. Selling the debt could bring in a one-off payment amounting to more than Pounds 3 billion but selling the company could save Pounds 1.3 billion a year.

Accounting rules mean the private sector will have to take on most of the burden of administering the system as well has loaning the money if it is not to be counted as public expenditure. Iain Crawford, who has been discussing the issue with the Treasury, together with his colleague at the London School of Economics' Centre for Educational Research, Nicholas Barr, says officials have so far failed to find any way around the problem.

"If Labour wants to improve education across the board and wants to stick to Gordon Brown's spending limits, there's no other source of revenue available," he said. "There's no pot of money that big to devote to restoring the perceived and genuine deterioration of quality due to expansion in higher education without losing funding for lower class numbers and the under-fives."

The Government has already come under pressure to explain how it will meet its pledge to guarantee nursery places for all four-year-olds and reduce class sizes for under-sevens to 30 or fewer. Money saved by changes to student loans could help it meet these targets without cuts elsewhere.

David Blunkett, the new secret ary of state for education and employment, said at his first press briefing: "I didn't indicate in the manifesto that we were about to cut higher education to deliver our nursery pledge. We are examining the issues of the voucher scheme and bureaucratic costs in the next few weeks."

Any changes to the loans system will have to await the recommendations of Sir Ron Dearing's committee, due to report in July.

But next week's Queen's Speech is expected to leave the way open for changes in student loans and university structure. This would mean any post-Dearing changes could be enacted quickly.

Introducing income-contingent repayments for students was the first essential step, said Mr Crawford. "If the state is managing the repayments even though the money comes from pension funds or banks, it would almost certainly be classified as public expenditure. Technical adjustments have to be made - one of which is almost certainly to sell off the student loan company. If the company remains state owned, it will have to be classified as public expenditure and Gordon Brown won't be able to keep his promise."

Students are worried that the transfer of the loans company to the private sector would leave them at the mercy of the market. They feel the present system has been a failure.

Louise Clarke, spokeswoman for the National Union of Students, said: "The main thing is protecting consumers now and in the future. But if selling off the student loans company means abolishing it that's probably a good thing."

A spokesman for the Committee of Vice Chancellors and Principals said it had left the door open for taking on the student loans company itself.

At a council meeting earlier this year, vice chancellors agreed that if the company was privatised and there was a choice between commercial ownership and ownership by the university sector, ownership by the sector would be better.

A spokesman for the Department for Education and Employment said: "Ministers will be looking at a variety of decisions and this will be one of them."