Select Committee on Education and Skills Appendices to the Minutes of Evidence


Memorandum from Dr Nicholas Barr (SS 18)

  1.  Reading the Minister's evidence brought a sense of deja vu, having 10 days earlier listened to evidence from the NUS. It is a pity that the Minister's brief let slip an opportunity to discuss key strategic issues—for example, the answer in paragraph 273 is simply a statement of objectives, not a policy designed to achieve them. And (since I have been told that the Department read my written evidence (24 April) carefully and in its entirety it is also a pity that the Minister's characterisation of what Iain Crawford and I propose is inaccurate.

  2.  This note does not comment on areas where I agree or disagree with the Department's views but—deliberately more narrowly—discusses areas where the Ministerial brief is incomplete or, on the face of it, in error. Three areas merit discussion:

    —  the emphasis on complexity;

    —  a faulty representation of the arguments in my written evidence; and

    —  one-sided interpretation of evidence.

  3.  Additionally, I take the opportunity to correct an error I my earlier evidence about the timing of debt forgiveness.


  4.  The brief repeatedly talks about complexity: "it has been a complex exercise" (Q 220); "There is a huge range of options and the trick is not thinking of them but doing the very detailed work" (Q 227); "I think you are trying to make too simplistic a conclusion of what is very complex (Q 250); "We are looking at a huge range of options" (Q 365); "using that as an illustration of the complexity of the argument" (Q 274); "what may seem like a straightforward solution is rather more complicated" (Q 278); "it is really a bit more complicated than it seems at first sight" (Q 279).

  5.  Of course, no reform is simple. But the brief frequently refers to complexity without explaining either the nature of the problem or the possible range of solutions.

  6.  As an example, Q 278 alludes to potential problems with the Consumer Credit Act. These are discussed in paragraph 104 of my main written evidence:

  "There are two potential avenues to resolving the problem;

    (a)  revise the CCA to accommodate income-contingent loans; or

    (b)  ensure that the legislation bringing in new student support arrangements explicitly excludes those arrangements from the CCA via Statutory Instrument.

  Approach (b) presents no obvious problems: a loan which charges the Government's cost of borrowing is within the spirit of the CCA; the process in (b) is simpler and quicker than (a); and it leaves it open subsequently to amend the CCA if the government so wished."

  7.  The arguments about the balance between the contribution of the individual, the family and the state (Q 256), can be considerably simplified. What Iain Crawford and I propose is a single system of student loans which are (a) large enough to cover all living costs and all tuition fees and (b) attract an interest rate equal to the Government's cost of borrowing. On that foundation it is then possible to build a wide range of targeted interventions of at least two sorts:

    —  to reduce exclusion (discussed further in paragraphs 16-18 below); and

    —  to assist labour market adjustment, for example for giving over a period of years the loans of nurses and primary school teachers.


  8.  It is worth quoting paragraph 40 of my main evidence in full:

    "40.  What interest rate? First, it is important to be clear what I am not saying:

      —  at present graduates pay an interest rate equal to the rate of inflation. Press discussion of `market interest rates' evokes worries about high interest rates associated with credit cards and overdrafts. That is not what is meant. The interest rate which graduates should pay on their loans is the Government's cost of borrowing, ie broadly the interest rate the Monetary Policy Committee announces;

      —  the attack is on blanket interest subsidies. A strong case can be made for targeted interest subsidies—for example someone who is employed for caring for young children or other dependants—to make sure that their debt does not spiral upwards. Mechanisms for such targeted assistance are discussed in section 4.2".

  9.  The Department's discussion of Iain Crawford's and my proposals on interest rates is faulty in respect of both bullets:

    —  it misstates the interest rate we propose; and

    —  it omits any mention of the array of targeted subsidies we explicitly advocate.

  10.  What interest rate? The Minister says (Q 236), "The rate that they talk about is actually 6 per cent which is the discount rate that the Treasury currently use . . . plus the 2.3 per cent that we currently levy to keep the real value of the debt, so in fact what you would be charging would be 8.3 per cent under the Barr/Crawford scheme".

  11.  It is useful to distinguish three questions.

  12.  What interest rate do Barr and Crawford advocate? As stated in paragraph 40 quoted above, the interest rate we propose is the Government's cost of borrowing. The current interest subsidy is a fiscal black hole (on the Government's own figures, some 35 per cent of total lending to students); the only purpose of charging students what it costs the Government to raise the finance is to plug that black hole; the purpose of so doing is to raise the resources to pay for targeted subsidies. The argument is as simple as that.

  13.  What is the Government borrowing rate? Currently the Government can borrow at about 4 per cent. Separately, but related, the base rate set by the Monetary Policy Committee is currently 4 per cent. The interest rate mentioned by the Minister—a real interest rate of 6 per cent— is unambiguously higher than the Government's borrowing rate. Thus to say that "the rate they talk about is 6 per cent" (let alone 8.3 per cent) is factually wrong.

  14.  What interest rate should be charged on student loans?

    —  the Treasury discount rate is the right concept for questions like "should we build a second bridge across the Thames at Dartford?" or "is it in the national interest to increase investment in higher education?" It is used to discount to the present benefit streams (often extending into the longer-term future) and costs (often short run). The rate allows for uncertainty, including uncertainty about future interest rates;

    —  the Government's cost of borrowing is the rate of interest that measures the cost of finance, and hence is the right concept for addressing the question, "how can we design a loan scheme which (apart from social policy elements) is self-supporting?".

  15.  If the Department wishes to argue that the rate of interest should be 8.3 per cent that is, of course, a matter for the Department. However, the two concepts are clearly very different. The Minister concludes (Q 237), "I think Barr and Crawford would concur on that 8.3 per cent". Barr and Crawford would not. We talk about a 4 per cent rate.

  16.  Targeted subsidies. The Minister's brief argues that a £10,000 loan attracting an interest rate of 8.3 per cent will require total repayments of £28,300 for a low earner, and £59,000 for a low earner with a career break. It is, of course, true, that slow repayment plus a high interest rate leads to spiralling debt if nothing is done to prevent it. The Minister's evidence implies that increasing the interest rate is all that Iain Crawford and I propose. Again, this is factually wrong—see the second bullet of paragraph 40, quoted above.

  17.  To repeat, the whole point of raising the interest rate on student loans to the Government's cost of borrowing is to eliminate spending on a blanket subsidy to release resources to finance a range of targeted subsidies. The targeted subsidies are discussed in some detail in my main evidence, since they are a fundamental purpose of the exercise (the other being quality). They are of two sorts:

    —  ways of protecting low earners through targeted interest subsidies are discussed explicitly in my main evidence, paragraphs 58-62;

    —  active measures to promote access, one of the major planks of our strategy (see main evidence, paragraphs 74-80), include scholarships, additional support for students from poor backgrounds once they reach university, large-scale action to raise the aspirations of young people, and more resources earlier in the system.

  18.  Thus to state (as in Q 248) that "If you start thinking that the answer to student support is simply to raise real interest rates on student loans, you are in danger of hitting those very students whose interests you most want to protect" is not an accurate representation of our views.

  19.  One final point. The Minister states (Q 293) that "Lifetime earnings [of a graduate] are £400,000 more". Compared to that, the additional cost of raising the interest rate to the Government's cost of borrowing on a loan of £12,000 repaid over 17.5 years is about £4,250 (main evidence, paragraph 90).


  20.  The Minister's brief (Q 229) states that:

    "In 1960, out of the top three groups—if you divide them into A/B/C and then C2/D/E—27 per cent went to university and only 4 per cent of the three lower groups went to university . . . If you look at the 2000 figures, 48 per cent of those in the top three groups go and now 18 per cent in the bottom three groups . . ."

  The Minister then argues that the gap—23 per cent in 1960, 30 per cent in 2000—has got wider, and hence that inequality has got worse. It is equally true to say that the probability of someone from a C2/D/E background going to university is now four and a half times as high as in 1960 (18 per cent as opposed to 4 per cent), a huge advance with considerable implications for perceptions about the relevance of university to people from poorer backgrounds. This is not to sound complacent—far from it—but one-sided use of statistics does not advance discussion.

  21.  In the same paragraph, the Minister says that the Department is getting "quite a lot of anecdotal evidence . . . that debt and the fear of debt is an inhibitor". This might well be the case. However, (a) "anecdotal" evidence is flimsy ground for making policy, and (b) if it is indeed the case that debt aversion hinders access, the problem could well be the woeful inadequacy of the Government's attempts to explain how income-contingent loans work. If debt-aversion is somehow intrinsic, this might point towards keeping overall debt low; if, on the other hand, the problem is lack of understanding by students and their parents, part of the solution is a major exercise to explain the scheme, so that student debt is seen as no different from future liability to pay income tax.


  22.  Mea culpa. My main evidence (paragraph 42) states that unpaid debt is forgiven after 25 years. That was true with the old (mortgage style) loan scheme. But with the current scheme, unpaid debt is forgiven only at age 65 (or upon earlier disability or death). Thus for most students, unpaid debt is forgiven only after 40 or so years.

  23.  A good case can be made for forgiving debt after a shorter period than 40 years, perhaps even reverting to the 25 years of the old loan scheme. This would (a) be unambiguously progressive, benefiting people with low earnings over an extended period, and (b) would not be very expensive.

Dr Nicholas Barr

May 2002

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