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Mr. Julian Brazier (Canterbury): As we are unlikely to have an opportunity before the summer recess to debate any additional burdens that are likely to be placed on students as a result of the Dearing report, I believe, as someone who represents a constituency with a lot of students, that we must consider the total burden on students and that it would be better to focus on tighter quality controls, as several of us suggested in written submissions to Sir Ron Dearing, rather than imposing tuition fees or other still greater burdens on students.
Mr. Byers: I can understand why hon. Members want to focus the debate on what might come out of the
Dearing report, but I must reiterate that the measures before us today have nothing to do with the recommendations that will come from the Dearing inquiry or the approach that the Government will adopt towards them. I understand the hon. Gentleman's concern. It may help him to know that my right hon. Friend the Secretary of State for Education and Employment intends to make a statement on the Dearing inquiry to the House on Wednesday. That will provide an opportunity for hon. Members to raise such concerns.
Mr. Phil Willis (Harrogate and Knaresborough): Are the £1.6 billion in this financial year and the £1.5 billion in the next financial year net of subsidy? If they are not, how much subsidy does Minister expect to be netted off?
Mr. Byers: I am afraid that I cannot comment on the level of subsidy at this stage because, as the hon. Gentleman knows, there is a competition, which was started by the previous Administration, for the sale of student loan debt. I will deal later with the power in the Bill to give a subsidy to the purchaser of student loan debt. We cannot say at this stage how much that subsidy will be, but I can say that there is a very strong competition between 20 leading financial institutions, and we intend to ensure that the lowest possible subsidy is achieved through that. It would be inappropriate to comment on the level of subsidy, because we do not want to show our hand to the competing companies.
The Government were elected on the basis of a manifesto pledge to work within the spending plans already announced for the next two years. That pledge and our pledges on inflation and taxes are designed to create conditions for economic stability and a platform for sustained economic growth. Proceeding with the sale of loans will play a critical role in enabling us to keep that pledge. The public spending plans that we inherited include substantial sales of student loans in this financial year and the next. Given the tightness of those plans, and the need to give priority to our education programmes, as the Chancellor of the Exchequer did in his Budget statement on 2 July, we have decided that we will proceed with the sales.
To achieve the level of receipts planned by the previous Government, we will need to pay some subsidies to the loan purchasers, but the sales will be made through competitive tendering. As I said earlier, 20 substantial financial institutions have already responded to the first stage of the competition. We intend to accept the most competitive bid. While the scale of subsidies cannot be predicted in advance, we will ensure that we get the lowest possible subsidy required to be attractive to the private sector.
Before coming to the details of the Bill, it may be helpful to the House if I put them into context. Two measures on the statute book deal with student loans: the Education (Student Loans) Act 1990, and the Education (Student Loans) Act 1996, which introduced the twin- track procedure. Hon. Members might have found it difficult to understand how this measure impacts on those Acts, so I provided in the Library last Thursday a note that clearly showed its effects. I also sent copies to the shadow Secretary of State for Education and Employment and to the hon. Member for Bath (Mr. Foster). I hope that that will be useful in considering the Bill.
The Bill is, in many respects, a technical matter. Hon. Members may ask why we need to proceed now and why we should not delay at least until the Dearing report comes out. As I said, the Bill is quite different and distinct from the Dearing report, and it would be a mistake to confuse the two issues. Today, we are considering student loans which were made under the existing regime or will be lent in the forthcoming academic year. Those will be unaffected by any proposals that might come from the Dearing report.
Many people believe that there are sufficient powers under the 1990 and 1996 Acts to allow my right hon. Friend the Secretary of State to pursue the measures in the Bill. However, experience and, in particular, advice from our private sector advisers and from counsel, as well as feedback from the first stage of competition, have shown that there are substantial gaps in the legislation that need to be filled if we are to achieve a sale that meets the needs of the loan purchasers, the borrowers and the Government.
The Bill has three main provisions. In brief, their purpose is to make the loans into something that the private sector can recognise, work with and value. Clause 1 is about the power to sell public sector student loans. It amplifies and replaces an earlier power contained in the 1990 Act. In particular, it allows the lender, in this case the Student Loans Company, the power to assign its rights over the loans in question. It also allows my right hon. Friend the Secretary of State to pay subsidies to loan purchasers in such circumstances as he judges necessary in the light of the competition. It also allows us to buy back some of the loans sold and to assign them as necessary to a third party.
Mr. Robert Jackson (Wantage):
Will the Bill enable future student loans to be dealt with in the way that the Bill provides?
Mr. Byers:
Student loans made available during the academic year 1997-98 will be covered by the provisions outlined in the Bill. In later years, it will depend on the circumstances that arise from any recommendations that come from the Dearing report. We will have to bide our time and wait to see what recommendations the Government will make on Wednesday in the light of the report of the Dearing inquiry.
Clause 1 also allows the Government to buy back some of the loans that have been sold and assign them to a third party. Our intention in taking this power is to enable the Government to buy back loans that we want to cancel for social policy reasons. For example, it is the policy of the Government to cancel loans where the borrower dies. In such circumstances, we might want to be able to buy back loans assigned to a private sector party. Clause 1 allows us to do precisely that. We do not believe that it would be reasonable to pass such a burden to the private sector. It is a matter of public policy and it is therefore right that that power should reside with the Secretary of State.
Finally, clause 1 provides for an independent complaints procedure. Currently, borrowers can take complaints about how their loans are administered to an independent assessor, whose rulings are binding. Clause 1 will ensure that borrowers whose loans are sold retain that important right.
As I said, to achieve the planned level of receipts, it will be necessary to pay subsidies to the purchaser. That is inevitable because student loans are unusual.
The loan scheme is relatively recent, and there is little track record to allow the private sector to assess the risks involved. The purchaser therefore takes a gamble on the unknown. There is no real interest rate; loans are pegged at the rate of inflation so that borrowers repay only what they borrowed. Additionally, borrowers earning less than 85 per cent. of average income can defer repayments year on year. Those are not commercial loan terms, so the debt cannot be sold on such terms.
In those circumstances, without a subsidy, loans could be sold only at a fraction of their face value. By paying a subsidy that compensates the purchaser for some of the risk outside the purchaser's control, we will be able to achieve the best return. We shall do everything possible to ensure that the competition between bidders is strong. At the end, we shall accept only the best bid.
In clause 2, our objective is to freeze the terms of the loans when sold--which refers to the point made just now by the hon. Member for Bath. Loan terms can vary. The most significant core terms are the time and manner in which repayments are made, and the deferment and cancellation rights. If those terms are varied--for example, if more loans are cancelled for policy reasons, or the repayment periods are shortened--it could have a significant and adverse financial effect on the purchasers. Clearly, they are not risks that the private sector can control: companies would price the risk of change into their bids, or expect compensation in full. Either way, there would be a substantial cost to the Government.
Clause 2 therefore provides that loan agreements must set out in detail the core terms on time and manner of repayments, deferment and cancellation. Those matters are currently discussed annually when we debate the relevant regulations in the House. Once the Bill becomes law and before the sale, we shall make new regulations fixing the core terms for all loans. The terms will therefore be frozen, and loan purchasers will be protected from the financial cost of changes. The act of freezing will also protect borrowers. We shall make sure that the terms are frozen without change to those existing when the loans were taken out. That is one of the safeguards that we shall put in place to protect existing borrowers.
As to Clause 3, we want to put public loans on an entirely contractual basis, like any other commercial loan. It removes from the lender--the Student Loans Company--and subsequently from the loan buyer, the operation of public law functions. The key point is that, under existing legislation, the loans purchaser must exercise the public law functions by reference to the Student Loans Company. The functions cannot be transferred, and it cannot take any decisions itself. That makes administration complex, cumbersome and expensive--and, frankly, it is doubtful whether the loans could be sold on that basis.
Clause 3 ensures that buyers are dealing with the sort of loans they understand--loans subject to contract law and to consumer credit legislation--and not public law procedures, such as judicial review. Therefore, the clause removes all public law functions so that the lender and purchaser administer the loans purely as commercial contracts.
Hon. Members would naturally be concerned if the clause were to mark any reduction in the rights of borrowers, but it will not do so. The borrower will be safeguarded through our sale agreement with the
purchaser, which will set down minimum requirements as to administration. The borrower will also have the protection of the terms of the loan agreement, which will have specific provisions on the core issues of repayment. Borrowers will continue to have the general protection of consumer rights legislation.
Clause 4 is a straightforward extension of the provisions to the whole United Kingdom, and the remaining clauses are consequential. However, I draw the attention of the House to two specific issues. The first relates to the rights and the position of existing borrowers--which I know will concern hon. Members--and the second to the future role and function of the Student Loans Company. As far as the existing rights of borrowers are concerned, selling the loans and transferring the risk of default to the private sector inevitably means that the purchaser must take over responsibility for loans administration.
However, that does not mean that borrowers will be abandoned. We shall introduce a number of important and significant safeguards. We shall specify in the sale agreement with purchasers minimum collection standards that must be adhered to. They will be based on the present procedures adopted by the Student Loans Company. A purchaser's failure to abide by the minimum collection standards could lead to legal action. The borrower will be safeguarded by the terms of the loan agreement and, more generally, by consumer and data protection legislation.
Student loans are made on generous terms. With the right of deferment and the discretion that lenders have to deal with borrowers who run into financial difficulties, there is no reason why borrowers should default. Those who do must expect to have legal action taken against them, whether their loans are owned publicly or privately. However, such a regime should be sympathetic. We believe that the one presently operated by the Student Loans Company forms the correct basis for introducing our minimum collection standards.
Nor need there be concern that an unscrupulous private sector party will use information held on student borrowers for his own ends. The Bill states explicitly that no person shall provide or make available to anyone else any information held in connection with the loans if that information is to be used for soliciting custom and services.
Disabled borrowers are a special case, and they are dealt with as such in the existing legislation. There is considerable discretion to treat them more favourably according to the measures that the House has introduced already. We intend to ensure that they continue to receive such sympathetic consideration.
We therefore intend that such loans, when identified, should be bought back from the private sector. We shall retain an independent complaints procedure. At present, borrowers can take complaints about the way in which their loans are being administered to an independent assessor, whose rulings are binding. That important right must remain--and, under our proposals, it will.
The legislation will allow loans to be sold on by the original purchaser. Without this normal market freedom, it is unlikely that we would attract a buyer--certainly, the competition would be limited and the subsidy costs higher. However, our contract with the buyer will provide protection for borrowers by ensuring that the Secretary of State must approve all subsequent sales.
Hon. Members may be concerned about the future role of the Student Loans Company. That is a non- departmental public body, and its shares are wholly owned by the Secretary for Education and Employment and the Secretary of State for Scotland. Private sector institutions will have the freedom to choose whom they wish to administer the loans. The purchaser of the debt will have the option to administer the debt himself, to contract it out to a third party, or to use the Student Loans Company.
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