Subsidies for loans must end, MPs told

April 26, 2002

Higher interest rates on student loans and top-up tuition fees are the only way to secure sustainable funding for undergraduates and the universities they attend, MPs heard this week.

Economist Nick Barr of the London School of Economics and Iain Crawford, formerly of the LSE, told members of the education and skills select committee that the most important step was for the government to stop subsidising student loans.

They said that some £700 million of public funding will be ploughed into subsidies next year out of total estimated spending on loans of about £2.5 billion. This money would be better spent on giving grants and scholarships to poor students and increasing loan amounts to cover tuition fees, the economists said.

Their supporting paper to the committee argues that the interest rate on loans should be raised to the rate at which government borrows money, which is lower than commercial rates but higher than the zero-rate of interest on loans.

It argues that subsidised loans available to all full-time students, regardless of personal or family wealth, are expensive and, because of the cost, rationed in amount and number. This reduces the cash for higher education.

The paper says that the key to getting people to understand income-contingent loans properly is to admit that they are a targeted income tax. Dr Barr and Mr Crawford maintain that the government has been unwilling to do this because of the perceived unpopularity of any new tax.

But they argue that such a tax would be paid only by those benefiting from higher education, thanks to higher earnings, and only at a rate commensurate with their earnings. Graduates would repay only what they borrowed plus the interest, unlike an open-ended graduate tax.

The paper recommends lifting the cap on tuition fees, initially to £2,000 a year and thereafter to the market rate. But because loans would be extended to cover fees, entry to higher education would still be free at the point of use.

The government is reviewing student support but has run into difficulties because it cannot square the student funding circle without committing more public cash or opting for higher graduate contributions. Both present political problems.

The National Union of Students, which gave evidence to the committee, opposes ending the loan subsidy. The union called for maintenance grants targeted at the poorest students and an end to upfront tuition fees.

* Student debt is continuing to rise, according to figures published this week by NatWest showing that the average graduate will be £10,000 in the red this summer, writes Alison Utley . This is £3,000 more than three years ago.

The bank's poll of 2,000 students found that 15 per cent leave university owing nothing, while 10 per cent said they had contemplated dropping out because of financial worries.

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