House of Commons - Education and Skills

Select Committee on Education and Skills Fifth Report

Maintenance grants

168. The Government has also announced its intention to re-introduce maintenance grants. The White Paper says:

"We have listened to those who say that those from the poorest backgrounds need additional incentives and financial help to continue in full-time education. So, those students with parents on the lowest incomes starting full-time higher education courses will be eligible for a new Higher Education Grant of up to £1,000 a year. We will start this grant as soon as we can—from Autumn 2004."[223]

The White Paper goes on to say that this new Higher Education Grant will be available in full to all those students whose household income is £10,000 or less, and in part to those whose household income is up to £20,000.[224]

169. Two issues arose on the question of maintenance grants; the size of the award, and the number of students who would be available for the full award. Margaret Hodge explained why it was £1,000:

"We had the money available to us in this Comprehensive Spending Review settlement so we were anxious to introduce grants as quickly as we can, they are coming in 2004, we took the decision to set them at the £1,000 maximum level because that allowed us to reach about one third of the student cohort".[225]

The Secretary of State added that "The reason why we went down the course of the £1,000 grant is that if you have no access to any other resource at all, if you are from a particularly poor background or even because your parents refuse to support you in any way, then you actually have great difficulty surviving at university on the current level of maintenance loan".[226]

170. The general view of our witnesses was that the amount was too low to have any significant impact on students or potential students worried about their level of debt. Professor Trainor, for example, told us:

"I think it is a good thing that a single maintenance grant is being brought in—in place of this very confusing patchwork of hardship funds that we have had over the last five or six years in particular. But I think that the amount of this maintenance grant is very low…and the levels of income below which the individual family must fall are pretty modest. So I do not think it is going to make a huge difference."[227]

Sir Richard Sykes reminded us that the view of the Dearing Committee, of which he had been a member, was that if students were going to be charged a fee then maintenance grants should be kept in place:

"..I think that was the biggest problem, taking those away. And to come back with £1,000, five years later, seems to me like madness. If you really want to put in maintenance grants, you have to make them realistic."[228]

Sir Howard Newby agreed with this view, saying "I think £1,000 a year for maintenance allowance is frankly too low and I hope the Government will in time, when resources become more available, have another look at that".[229]

Education Maintenance Allowance

171. Another slightly different point was that the grant should have been linked with the EMA to provide continuity for those students from non-traditional backgrounds. NATFHE told us that:

"It is particularly disappointing that the grant levels are not linked, in amount and thresholds for payment, with the £1,500 Education Maintenance Allowance so that—if set at a realistic level—this would provide seamless transition in support terms from FE to HE".[230]

172. Professor Claire Callender of South Bank University argued along the same lines:

"The White Paper missed the opportunity of linking the receipt of the new student grants more directly with existing means-tested Educational Maintenance Allowances (EMAs) for 16-19 year olds, which are to be rolled out in 2004.

It would have been helpful if young people in receipt of the full EMA could have been guaranteed receipt of the full HE grant. This would have helped a seamless transition in funding for school leavers and FE college students into HE, and aided the simplification of student funding across these sectors."[231]

173. The Secretary of State responded by saying "I do not actually accept the argument that because this is the State support that you received at the age of 16, it should necessarily be the State support that you receive at the age of 20, but I do accept the argument…that it must be a coherent system and one which incentivises rather than disincentivises".[232]

Eligibility for the maintenance grant

174. There has been some confusion about precisely who will be eligible to receive the full £1,000 grant. The White Paper says that students from families where income is £10,000 or less will receive the full £1,000, and those whose family income is up to £20,000 will receive some grant. These limits appeared to suggest that a very small proportion indeed of the student population would be eligible for the £1,000 grant; figures from the Family Resources Survey 2001-02 indicate that only 7% of families with one or more dependent children between 16 and 18 have total income of £10,000 or less.[233]

175. When we saw Margaret Hodge, she told us that it was the Government's intention that the full £1,000 grant would be available to "30% of the cohort".[234] In a letter sent after that meeting, she told us that since the launch of the White Paper in January, "We…have received more up-to-date data which indicated that within the 30% of students to be supported, we may be able to afford to raise the threshold for the full grant higher than the proposed £10,000", and that a further statement would be made once the data had been checked. When we met the Secretary of State he acknowledged that the £10,000 figure had been arrived at in error, and also told us that he was not yet in a position to say what the income limit would be. He declined to offer an estimate, on the grounds that "having made the mistake before, I am rather loath to set another hare running".[235] The income limit for eligibility for the full grant has not yet been made public.

Assistance with payment of tuition fees

176. With the present standard £1,100 fee, the Government has a scheme to assist students from poorer families:

"Under the current system the Government spends over £400 million on paying the fees of those whose parents are least able to afford the standard £1,100 fee. This sum pays the fee in full for those whose parents are on incomes up to £20,000. For those between £20,000 and £30,000, it covers part of the cost of the fee. The Government will continue this spending on student support when the new contribution arrangements come into effect in 2006. This will reduce any contribution that students have to pay by up to £1,100 [uprated for inflation]."[236]

177. The question we put to Margaret Hodge was: should not the Government increase its support for students from poorer families so they are not disadvantaged when differential fees are brought in? In other words, should not the Government be willing to pay the maximum amount that a student may be charged under the new regime, in order to make the new scheme equivalent to the existing one? Her answer was that it was not necessary for the Government to pay fees up to £3,000 "because not everyone will be charging the variable fees". By the time we spoke to the Secretary of State, however, and put the same question to him, the view had changed. He told us:

"I think there is a good case for that, and that is why I have indicated that it is something we are prepared to look at".[237]

Student debt

178. We asked a number of our witnesses about levels of student debt and whether there were better ways of spending the money the Government is making available for student support purposes. We asked the NUS if, now that fees become payable after completion of a course, the money the Government was intending to spend paying off £1,100 in fees per year for the poorest students might be better used in providing increased maintenance payments and raising the threshold for maintenance. Mandy Telford said that if there was one pot of money:

"we would revert back to the suggestions in both Scotland and Wales, on Cubie and Rees, which was, essentially, that the money is targeted to students from the poorer backgrounds and given as a grant upfront, then everybody pays regardless of their backgrounds back-ended once they are earning a certain amount of money".[238]

179. We also raised the point with the Secretary of State. He said that his concern was to "manage the transition towards a system…which is acceptable and operates properly".[239] He added that

"in all the discussion that there has been about this document…the issue of student debt so-called flags itself up very substantially…and many colleagues, both in this Parliament and elsewhere, are very, very concerned that, if you take any steps to increase the level of student debt, that is a more serious disincentive to people going into higher education than it is for any other sector that can be taken. Now, they may be right or they may be wrong, but the reality is that there is deep concern about this question."[240]

180. One particular area of concern is those degrees which take more than three years to complete. The BMA, the British Dental Association and the Royal College of Veterinary Surgeons all argued that the level of debt that graduates would incur could seriously affect the numbers of students willing to enter their respective disciplines.[241]

181. A related issue is the amount of time that students spend working. Professor Brown of Liverpool John Moores University told us "Our own internal surveys have shown a significant number of students are working more than 30 hours a week for relatively low levels of pay to allow them to continue their studies". Professor Gerry McKenna of the University of Ulster criticised the White Paper for failing "to find any remedy to the situation in which many thousands of students have to work thirty hours week to fund their education yet are still deemed full-time students".[242]

The interest rate subsidy for student loans

182. We also looked at whether the money the Government spends on subsidising the interest rate at which student loans are repaid might be better used in other ways. Professor Barr, the leading critic of the current policy, which provides interest-free loans in real terms, has calculated that the current cost is £800 million a year, and that it will rise to £1.2 billion when the system of differential fees is fully operational.[243] Margaret Hodge defended the policy:

"By having a zero real interest rate policy we are actually supporting…those who will tend to come out as graduates on lower incomes, women who will have career breaks and others who will perhaps work in the voluntary sector or elsewhere where over their life time their earnings will be lower than if they go into the City. I think having a real zero real interest rate policy is a progressive policy and charging graduates real interest on their loans would have been a regressive option."[244]

The Department pursued a similar argument in its reply to our report of last session on student support.[245]

183. The NUS was also against the removal of the subsidy. Mandy Telford told us:

"the NUS does not support raising the interest rate on loans because it would mean that those who are the poorest graduates will pay the most for the rest of their lives. The richest graduates will pay it off quickly and the poorest will be paying it off forever and, therefore, accruing lots of interest."[246]

184. Professor Barr strongly contested this argument:

"The Department argues that 'those who benefit most ... are those who earn the least' (para. 30). Separately, it argues that targeted interventions'... only have the effect of channelling the subsidy back to those people—ie on lower earnings—who are the principal beneficiaries of the subsidy at the moment' (para. 31). Both arguments are —quite simply—wrong: they ignore the much larger total benefit for the great bulk of graduates who repay their loans in full. The same resources would do much more to help the poor if spent in ways…that do not leak out to the latter group."[247]

He suggested that, amongst other things, the money could be spent on larger maintenance grants; raising the income threshold for eligibility for grants; offering a super grant covering all costs to some students in their first year; increasing the full maintenance loan, abolishing the income test for the loan; and re-introducing debt forgiveness.[248]

Conclusions and recommendations

University funding

185. It is worthwhile looking back to the Dearing Report and what it had to say on the funding of higher education. Its conclusion was that "the costs of higher education should be shared among those who benefit from it",[249] with the individual, the State and employers all as key beneficiaries. We believe that principle is correct and should be supported. There have to be sufficient safeguards in the system to protect the interests of certain students, but it is correct to seek a contribution from the individuals who benefit from higher education.

186. We are even more convinced of this argument when we consider the additional benefits those who go to higher education receive compared to those who do not; between three and five years extra funding for education, and interest free loans. These students can be seen as foregoing earnings during this period. On the other hand, those who are in work and who do not go on to higher education are paying tax.

187. The third side of Dearing's funding triangle, contributions from employers, is scarcely mentioned in the White Paper. The only time it is discussed is in relation to the encouragement of corporate giving, and in particular the funding of endowments. There is, however, no acknowledgement of the benefit employers derive from a workforce trained in higher education through funding provided by the Government and by students themselves. Given that the Government wishes to see a plurality of income for the higher education sector, as do most if not all higher education institutions, we believe it should consider a more systematic approach to the funding of higher education by business.

188. The Government should consider introducing a levy on businesses above a certain size which do not commit a minimum proportion of their turnover to research and development to contribute to a pool of funds which flow to research and development activities at universities.

189. The Chancellor of the Exchequer should look seriously at improving the ways in which corporation and individuals can be encouraged to contribute to universities. A possible incentive to business would be to reduce VAT liabilities. We recommend that the Government explores ways of encouraging a more substantial contribution from business and individuals through the taxation system.

190. Allowing institutions to charge up to £3,000 in differential fees could be of great significance. Professor Floud said that this change would bring in a maximum of £1.8 billion a year to the sector overall, a significant source of income. We doubt, however, that it will bring about the Government's desired end that allowing higher education institutions to charge their students up to £3,000 per year will create a regulated market in higher education. The evidence we have heard suggests that the differentials in fees charged by universities and colleges will be small at best and possibly non-existent.

191. If the Government believes that a regulated market is required, it should create the conditions necessary to bring one into being. On the evidence that we have heard, the logic of the Government's position is that the cap should be set at £5,000. If it does not wish to take that step, it may have to resign itself to the fact that many if not most higher education institutions will set their fees at the maximum.

192. It has been reported recently that the Government will intervene to cut funding for student places at universities which charge the full £3,000 fee if it believes that it is inappropriate for those institutions to do so.[250] In other words, it will seek to impose a market if one does not arise.

193. Should the Government intervene in this way it would undermine its whole policy. It could have the bizarre effect of preventing those universities with the widest social intakes from raising extra funds while allowing those with a more socially skewed intake to do so, the precise opposite of its declared intention. We hope that the Government does not intend to seek to impose a market and believe it would be a very grave error of judgement if it did so. It would be quite wrong for the Government to act in this way. If a market does not arise it will be because of the restrictions which the Government has itself imposed, and it must live with the consequences.

194. Another concern is that an increase in the amount of private funding flowing into the system through student fees will lead to a reduction in the amount of public funding, transferring costs to individuals but not increasing the amount of money available to universities overall. If that were to happen, keeping the cap at £3,000 in real terms until the end of the next Parliament (so possibly until 2011) is likely to result in universities' income stagnating by the end of the period. The success of the Government in providing substantial extra funding for universities in this spending review will only have lasting effect if the amount of public expenditure on higher education is at least maintained in real terms at the levels announced in this White Paper.

195. A strongly held view has been put to us by a number of witnesses that if the Government believes that higher education is important, then it should grasp the nettle and fund it entirely through taxation. For example, Phil Willis MP explained to us in evidence how the Liberal Democrats proposed to fund higher education through a 50% rate of tax on those earning more than £100,000.[251] The price to be paid for that funding, however, is greater Government control of the sector. We believe that there is much evidence to show that there is an inevitable link between diversity of funding and the ability of universities to develop and to operate with greater independence and freedom.

196. The reaction to the Government's proposals on endowments has largely been sceptical, with institutions seeing them as at best a very long term measure. It should be recognised, however, that the will and capacity of British universities to match the drive of American universities to build up their private endowments has probably been affected by their perceived status over recent decades as wholly publicly funded bodies. As the proposed new mixed public-private funding system comes into effect, perceptions of the independence of universities will change and opportunities for raising private funds will change. Universities should be encouraged to seize such opportunities with vigour.

Student support

197. The issue of student support was the point at which we first engaged with the Government's higher education policy. There are now a large number of issues in higher education which are on the political agenda following publication of the White Paper, but none has a higher public profile than student support.

198. In our report in the last session of Parliament, we examined the different issues that need to be taken into account in establishing a system of student support that will be robust at least for the medium term,[252] and so we have not rehearsed all of those again here. Our conclusion, based on the recommendations of the Dearing Committee and others, was that the elements required of a system of student support are:

"A student support system for the future should:

be equitable, and encourage broadly based participation, and in particular should increase participation by first generation students;
require those with the means to do so to make a fair contribution to the costs of their higher education;
support lifelong learning, so that choices between part-time and full-time study and for discontinuous study and between higher and further education are financially neutral;
be easy to understand, administratively efficient and cost-effective and offer good value for money for both students and society;
integrate learning support across all post-compulsory education;
provide sufficient income, through loans, grants and access to the benefits system, to enable students to learn effectively, without detriment to their studies;
be integrated with the benefits system in order that students in challenging circumstances are able to access the support that they need; and
be additional to and not at the expense of institutional investment."[253]

The system devised by the Government falls short on a number of counts. It is complex and confusing. Support is not integrated across further education and higher education. Too many students have to work long hours during term-time to make ends meet because the amount provided for in maintenance is not sufficient. Finding the right combination of measures to provide effective support is crucial.

199. The most significant move by the Government arising from the White Paper is to shift the payment of fee contributions to the end of a course. This change means it is possible to separate out the two elements; maintenance to support a student's living costs while in higher education, and debt accumulated by the end of the course through fees and loans. We welcome the deferral of payment of fees until after completion of a student's course; this removes one very significant disincentive to participation in higher education.

200. With the shift to payment of fees after the completion of a course, the money currently used to pay up to £1,100 in fees for poorer students could instead be used to provide more substantial maintenance grants.

201. If the Government decides that it will continue to pay the fees of poorer students, rather than use that money to provide more substantial maintenance grants, then we believe that logic demands that they agree to repay the whole of the fee the institution charges rather than just the first £1,100. If the full fee charged is not paid, then students from poorer families will be worse off than under the present system. Either they will be compelled to choose an institution which charges no more than the present fee (which may be a very limited choice), or they will have to incur debt in respect of fees. We recommend that if the Government continues to pay fees for poorer students, it should fund the full cost of fees for eligible students, not just the first £1,100.

202. In our previous report, we argued that the zero real interest rate subsidy for student loans (and the blanket entitlement of all student to 75% of the full loan) subsidises those from affluent backgrounds while providing insufficient support for those from poor or otherwise disadvantaged circumstances, and that there was therefore a strong case for redistributing the existing public subsidy. As we noted earlier, both the Minister of State in her evidence, and the Department in its response to our earlier report, argued that to introduce a real rate of interest, at whatever level, is regressive:

"The effect is that graduates on lower incomes, since they pay for a longer period, will pay more in interest. And those that earn the least will pay the most. So it is clear that the effect of an interest rate subsidy, when combined with an income-contingent repayment regime, targets the subsidy rather well, in direct proportion to income. Those who benefit most from the subsidy are those who earn the least."[254]

203. As Professor Barr says:

"Taken at face value it is true that lower earners repay more slowly and thus end up paying more interest. The question then is how to protect low earners. The basis of the Department's argument is that to protect the poor, the commodity should be subsidised for everyone… Blanket interest subsidies...help low earners but…the major beneficiaries are graduates whose repayments stop after (say) 10 years with an interest subsidy rather than after 12 with a real interest rate, and those who take out loans only to benefit from the arbitrage opportunity."[255]

We are clear that what the Government needs to do is to target expenditure more effectively on those who need it, rather than continue with the undifferentiated interest subsidy. The removal of the interest rate subsidy would allow the Government to spend more on initiatives to improve access to higher education. We set out a number of the possibilities below.

204. One action which would directly address the low earners issue is to raise the income threshold at which loans begin to be repaid. The increase from £10,000 to £15,000 announced in the White Paper is welcome, but still falls far short of the Committee's previous recommendation that the level should be average earnings (currently around £24,500), and should keep pace with changes in the level of average earnings.

205. The re-introduction of the maintenance grant is welcome, although it is unlikely that it will provide much incentive to students from poorer backgrounds given that the amount payable is only £1,000. There was a hint from Margaret Hodge in evidence that it was set at that level because that was how much money there was available in the current Comprehensive Spending Review period, but that grants would be increased in the next CSR. If that is the Government's intention, we recommend that an announcement to that effect is made as soon as possible, so that those who may be considering entering higher education in 2006 have more clarity about the support arrangements that will be available.

206. We also recommend that the Government should make public without delay the income limits for eligibility for the grant.

207. If the money currently spent on the interest rate subsidy was used instead to enhance maintenance grants, it would be possible to pay full-cost maintenance grants to students from poorer backgrounds (for example at the level of £5,000 a year suggested as a reasonable amount for living expenses by the Secretary of State).[256] As Professor Brown of Liverpool John Moores University told us;

"..the main cost borne by students is not that of tuition fees, but is in fact the cost of personal maintenance, which is very inadequately supported through the student loan system".[257]

208. Charging the Government interest rate on loans would also allow larger loans to be offered, as the cost of the subsidy would no longer be prohibitive, and so make it less likely that students would have to borrow, or incur credit card debts, at commercial rates.

209. Even without removing the interest subsidy, it would be possible to alleviate some debt problems arising from credit cards and commercial loans by making further maintenance loans above the current limit available at the Government rate of interest. This would mean that students would not be required to incur commercial rates of interest on debt in order to fund their day to day living expenses.

One of our recommendations in our previous report was that the Education Maintenance Allowance model should be examined to see what it would cost to use as a vehicle for seamless support across further education and higher education.[258] In response, the Government told us it was undertaking a review of the funding of individual adult learners aged 19 or over outside higher education "and is considering the most cost effective ways of targeting financial assistance".[259] We hope that the review of funding of individual adult learners will soon be concluded, and we continue to believe that the introduction of an educational maintenance allowance for those in higher education would be an effective way of encouraging participation in higher education.

211. One issue which needs to be addressed with some urgency is the wide range of thresholds for assistance at different points in the student support system. To quote only one example, why is that students who are financially independent of their parents and whose total income is less than £18,040 currently do not have to pay any of the £1,100 standard university fee, but the income threshold for graduates for repayment of loans is £10,000, rising to £15,000 under the proposals in the White Paper? The differing thresholds for assistance at different points in the system help to foster confusion and mistrust, and so create barriers to access. The system should be simpler, more logical and easier to understand.

223 The Future of Higher Education, para 7.36. Back

224 ibid. Back

225 Q 74 Back

226 Q 746 Back

227 Q 696 Back

228 Q 697 Back

229 Q 514 Back

230 Ev 43 Back

231 Ev 281 Back

232 Q 744 Back

233 Ev 280 Back

234 Q 34 Back