Third Standing Committee on Delegated Legislation
Wednesday 8 March 2000
[Mr Jonathan Sayeed in the Chair]
Draft Education (Student Loans) (Repayment) Regulations 2000
The Parliamentary Under-Secretary of State for Education and Employment (Mr. Malcolm Wicks): I beg to move,
That the Committee has considered the draft Education (Student Loans) (Repayment) Order 2000.
May I first, Mr. Sayeed, welcome you to the chair?
From April, a new system for the repayment of student loans will provide for the collection of repayments through the tax system. Repayments will be made in line with income, which will mean a fairer and more effective system for the recovery of student loans.
The committee of inquiry into higher education, led by Lord Dearing, recommended that repayment of student loans should move to an income-contingent basis, and repayments should be collected through the tax system. Those were among proposals that received cross-party support during the passage through Parliament of the Teaching and Higher Education Act 1998.
The 1998 Act provides for the Secretary of State to make regulations to introduce the new system. The regulations are the first to deal with repayment of student loans to be made under section 22 of the Act. They were laid before Parliament on 17 February and were considered by the Joint Committee on Statutory Instruments. I apologise for the delay in bringing these regulations before the House. We intended to do so towards the end of last year, but their drafting raised a number of difficult issues, including the impact of Scottish devolution. I should like to record my gratitude to Treasury Ministers and their staff in the Inland Revenue for helping to introduce the new arrangements.
The regulations will apply to students who have entered higher education from 1998-99, excepting those such as gap-year students, who were treated under the previous arrangements for specific reasons. They will introduce three important changes to the present system of student loan repayment: a new repayment threshold of £10,000 a year, a liability to repay 9 per cent. of income above that level, and the collection of repayments through the tax system.
The move to a system in which loan repayments are varied according to the income of the person repaying the loan is an integral part of the Government's new student support system. Student loans are now the main source of Government support for the living costs of students in higher education. It is right that the system for repaying them should be fair, so that students are not deterred from entering higher education by concerns about repayment, and effective, so that public funds are properly recovered.
Mr. Tim Boswell (Daventry): Will the Minister explain what is fair about kicking in the repayment of loans at an income of £10,000 a year? Under the previous system of mortgage-style loans, the kick-in figure was almost double that.
Mr. Wicks: It is right to ensure that students are able to begin repaying loans at a reasonable income level, and, in our judgment, that is the right threshold. Students should be able to start repaying loans relatively early in their salaried careers, so that they are repaid before other expenses, such as those relating to house purchasing and raising children, are incurred. One must be sensible about student's ability to pay back loans relatively early.
I should like to draw attention to the regulations' three main provisions--
Dr. Evan Harris (Oxford, West and Abingdon): In the light of the point made by the hon. Member for Daventry (Mr. Boswell), would the Minister agree that, if one wants students to repay loans in good time, the setting of a higher threshold under these arrangements does not prevent them from making voluntary repayments? The system of accounting dictates that there will be a lower threshold--the longer that students wait before they begin to pay the money back, the more likely it is that the loan will not be repaid. Financial adjustments have to be made under resource accounting to treat the money not as a loan but as a grant. The Government's policy should involve a financial incentive.
Mr. Wicks: I explained that we had to make a judgment about the threshold. In view of the other costs that students face, I should be concerned if students were encouraged to delay repayment because the threshold was too high. Under our proposals, one could have an annual income of £20,000, and the repayment would be £2,000 a year. Committee members must judge whether those figures are too high. The nature of a loan is such that, by definition, it will have to be repaid at some stage. Our approach is fair to the student, the public and the taxpayer.
Mr. Boswell: The Minister has expressed concerns about early repayment. Will not his proposals at least double the average debt that an undergraduate incurs? The Minister said that when the repayment formula cuts in at that level, it will have only a small impact. However, will the number of years that are required in order to discharge the debt increase considerably and perhaps run into the former student's mid-career?
Mr. Wicks: Committee members cannot have it both ways. One cannot logically call for a more generous threshold, which would mean that students would not start to repay their loans until well into their careers, and express concern about the fact that students will still be repaying loans well into their careers. Logic has to come into the debate somewhere.
The regulations have three main provisions. Part I describes their scope. Recovery of student loans through the tax system is a reserved matter under the Scotland Act 1998. The regulations therefore extend to the United Kingdom where they confer powers on the board of the Inland Revenue. They apply to the recovery of Scottish loans where Scottish Ministers so decide. Scottish Ministers will also make regulations for matters that are devolved, such as collection from borrowers who are outside the tax system. Parallel regulations for Northern Ireland are expected to be made under an Order in Council.
Part II contains general provisions. Borrowers will not be required to make any repayments until 6 April, after they have completed or left their course. They may repay their loans before they are required to do so, if they wish.
The Secretary of State, through the Student Loans Company Ltd. will tell borrowers and the Inland Revenue when repayments are due to start and when they should stop. Borrowers whose loan is for a postgraduate certificate of education, and who are at the same time required to repay an earlier mortgage-style loan, will be able to suspend payment of their income contingent loan until the earlier loan is paid off.
Loans will be cancelled when the borrower reaches the age of 65, dies, or becomes disabled and permanently unfit for work, provided that repayments that are due at that date have been made.
If a borrower makes repayments that exceed what is owed, the Secretary of State must refund the overpayment together with interest. Where a borrower has made repayments through his employer and his or her income in a particular year turns out to be less than £10,000, he or she may apply to the Secretary of State for a refund.
Mr. Boswell: This is a technical rather than a political point. The Minister said that repayments of overpayments must include interest. Will that apply to small sums? The Inland Revenue does not normally pay interest on relatively small sums. An overpayment might be made on a student loan when the student changed job or had not had his tax code updated. Would the Inland Revenue refund interest on the repayment?
Mr. Wicks: Yes, I can confirm that that applies at low levels. It is important that it should. I dealt with the issue of overpayments, about which a question was asked.
Part III deals with recovery through self-assessment for tax. Borrowers who, for tax reasons, need to submit a self-assessment tax return will be liable to pay 9 per cent. of their total annual income over £10,000, including any taxable unearned income of more than £2,000. For those purposes, certain sources of income will be excluded. Among those exclusions are incapacity benefit, disability living allowance and other social security benefits that are not taxable--the working families tax credit, disabled persons tax credit and benefits in kind. Relief for pension scheme contributions will be given in line with established rules for tax relief. When making a self-assessment return, borrowers will need to calculate how much student loan is due, and will take account of any repayment collected by their employer. The Inland Revenue will make that calculation for borrowers who submit their returns by 30 September.
Borrowers will need to keep records supporting the information in their returns. In practice, that will involve keeping little more than they already do for tax purposes. Borrowers who are late in making repayments or sufficient repayments, or who fail to make a tax return correctly or on time may be liable to pay surcharges, interest on overdue payments, and penalties in line with those that apply to income tax.
Mr. Phil Willis (Harrogate and Knaresborough): I apologise to the Committee for arriving late. I also apologise to the Minister.
In the case of an employer whose employee does not inform him that he has a debt to the Student Loans Company, will that employer still be held responsible for collection?
Mr. Wicks: I hope the the hon. Gentleman will allow me to cover that point in my concluding remarks, which will ensure that I give him absolutely the right answer.
Part IV deals with recovery by employers. That is the main part of the regulations, as it will constitute the bulk of student loan recovery. Loan repayments will be collected and accounted for by employers in the same way as income tax and national insurance. Deductions will be based on earnings liable for national insurance. The amount of loan repayment will be 9 per cent. of a borrower's earnings over £192 a week or £833 a month. The Inland Revenue will send a notice to employers to inform them that they have an employee who has a student loan, and will tell employers when to start making repayments. Employers will not have to work that out for themselves, nor will they know or need to know the size of an employee's loan.
Employers will record loan repayment deductions during the year on the P60 form issued to employees after the end of the tax year. Employers will pay deductions of student loan repayments to the Inland Revenue, at the same time as they pay income tax and national insurance. The Inland Revenue will be able to recover any student loan repayments that have been deducted, in the same way as income tax is recovered. Similarly, any unpaid loan repayments will attract interest at the rate that applies to unpaid income tax. If an employer fraudulently or negligently makes an incorrect deduction, or makes or receives an incorrect payment, he may be liable, after the end of the year in question, to a penalty of up to £3,000 for each employee who has been affected.
Part V deals with borrowers who are not resident in the UK for income tax purposes. Borrowers will have to tell the Secretary of State by informing the Student Loans Company if hey are resident overseas for more than three months. On request, they should provide other relevant information about their residence overseas, such as the purpose of their stay and their employment. If a borrower fails to provide such information, the Secretary of State may impose penalties. To help ensure compliance, a borrower who does not supply evidence of income may be liable to repayments based on notional income, set at twice UK national average earnings. Some 9 per cent. of income over £10,000 will be applied to that figure.
The new arrangements will in time affect large numbers of graduates and employers. We have therefore consulted extensively. An employers' group has helped the Inland Revenue to identify ways of keeping additional work for employers to a minimum, and with a range of technical issues. My Department also held a 10 week public consultation by sending draft regulations and a regulatory impact assessment to 100 interested organisations, and placed these documents on its website. A number of the organisations consulted were also offered meetings to discuss the new arrangements. A summary of the main responses to the consultation has been sent with the draft regulations to those who were consulted.
In the consultations, we took particular note of the points raised in relation to small businesses. The regulations require employers to undertake a new activity. However, the work involved has been kept to a minimum and the effect is gradual. Because the regulations apply only to loans taken out by new students from 1998, we estimate that the number of employers affected will be small to begin with--no more than 28,000 across the UK in the first year. A regulatory impact assessment, which is available from department sets out the impact on employers, as well as the benefits of the new scheme.
I have looked carefully with my right hon. Friend the Minister for the Cabinet Office at the impact on small firms. We have agreed that we will conduct a review of the first year of the scheme and consider giving additional help if the impact is found unduly burdensome. My staff will invite small firm representatives and the new Small Business Service at the DTI to help with design of the review.
We have ensured that borrowers and employers have been kept well informed about the new arrangements. My Department has provided students with annual terms and conditions booklets about repayment. The Student Loans Company is informing borrowers who may be liable for repayment from this April about the precise arrangements.
The Inland Revenue has provided a range of information to employers, backed up by targeted publicity campaigns, including instructions in the latest employers pack and a guide for employers. They also advertise an employers helpline for further assistance. Therefore, employers who will be affected should be ready to start collections for the coming tax year.
The draft regulations will enable the Government to introduce a fairer and more effective system for recovering student loans. I believe that the Committee should approve them and I commend them to the Committee.