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Dr. Pugh: The Minister asks how we would fund HE, and our answer is clear: we would do it by means of progressive taxation. He asks what we would do about the future expansion of universities. Is it the Government's default approach that they will get any extra money that is needed from the student, and not from any other source?

Dr. Howells: Part of the money comes from students, as I am sure the hon. Gentleman knows, but the taxpayer gives huge subsidies to the universities, and
 
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that will continue. My argument is that the benefits that accrue from obtaining a degree—largely at taxpayers' expense but with some contribution from students—make it just about the best investment in the future that anyone can make. I should be very interested if the hon. Gentleman were to say that he disagreed with that.

We have to remember two things: first, not everyone goes into HE—currently, just 43 per cent. of 18 to 30-year-olds do so; and secondly, going into HE confers substantial benefits, both social and financial, as I just hinted. In particular, the average rate of return to people who have a degree is very substantial, and evidence from the Organisation for Economic Co-operation and Development shows that, in the UK, it is among the best in the world.

It is therefore fair to ask those who benefit from HE to contribute to the costs. I remember being shocked, in 1997, when I read the report by Sir Ron Dearing, as he was then. The report spoke about the need for a contribution from students, but I belong to the generation that received what people called "free education". It was not free, of course, but was paid for by the other kids in my village who did not go to grammar school or university. I was lucky, but they were not, and they paid for me.

Mr. David Rendel (Newbury) (LD): I agree with the Minister that some graduates are likely to gain some financial advantage from going to university, but that should not be exaggerated. Has he forgotten that many graduates would probably have entered well-paid jobs even if they had not gone to university? They would have started earning sooner than those who started university, and their lifetime earnings would have been larger as a result. I agree that there should be wider participation in university education, but has the Minister also forgotten that as the number of people who go to university increases, the difference between the average salary of those who go to university and those who do not decreases? He should not exaggerate the case.

Dr. Howells: I apologise to the House if I have exaggerated the case. I did not mean to do so, and the hon. Gentleman is right to remind me of those matters. However, as a general rule, it is true that, on average, graduates will have considerably larger lifetime earning than others. It is also worth bearing it in mind that in future we as a nation will not earn as large a part of our national income from manufacturing industry as was the case with previous generations. The nuts-and-bolts jobs that used to sustain many parts of the country are disappearing, and almost every prediction of future employment that I have read suggests that we need more and more skills of the sort that are taught in many of our universities these days. If we do not take that seriously we will have big problems. However, I take the hon. Gentleman's point.

The advantage of the Government's policy—that is, fees supported by income-contingent loans—is that the graduate still pays through the tax system, but that the universities are much more masters of their destiny, with an independent source of revenue. I very much agree with the hon. Member for Wantage (Mr. Jackson), who
 
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intervened earlier to say how the great American institutions get money in and sustain their income. We have a good deal to learn in that respect.

Mr. Robert Jackson: The hon. Member for Harrogate and Knaresborough (Mr. Willis) seemed to think that only private institutions in America took that approach, but that is not so. Berkeley college is a state university, but it has a bigger endowment than Oxford university.

Dr. Howells: I know little about these matters at present, and the hon. Gentleman knows much more than I, but I am very interested in the courses offering general access to university that are going on in and around Berkeley. They seem to be growing as a consequence of at least some of that income being sustained, and at a high enough level to allow experiments with other forms of higher education. Perhaps we will have time in this afternoon's debate to touch on what we call foundation degrees and work-based degrees. We have a good deal to learn from the Americans about that as well.

Another aspect of the Liberal Democrats' policy needs to be examined. Under their proposals as I understand them—I am sure that the hon. Member for Harrogate and Knaresborough will correct me if I am wrong—students would study at home for their first two years.

Mr. Willis indicated dissent.

Dr. Howells: The hon. Gentleman shakes his head, but I shall string together a couple of questions for him, to check what his party's proposals are. First, what would their proposals mean for students who come from poorer backgrounds, or from parts of the country without an older university or one built in the 1960s? Would their ability to study at the best universities—I realise that that term is dubious— become a lottery based on where their parents live?

Mr. Willis: I am grateful to the Minister for allowing me to respond on that point. I realise that he has much reading to do in his early days as a Minister in the Department for Education and Skills, but I recommend that he read the Liberal Democrat policy document entitled "Quality, Diversity and Choice". It looks at HE and its relationship with further education and it recommends moving to a system based much more on credit, as is the case in the US, with a much more mobile student population. We do not want students to stay at home, in the strict sense, but we accept that the reality now is that roughly every other student is part time. Almost all of those part-time students study from home, and we must recognise that they are a very important part of the equation. Of course that should not preclude students from being able to apply to the most prestigious universities for the courses that they want to follow, but we should not say either that people who study at their local university are being offered an inferior product.
 
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If the Government say that, they are doing a huge disservice to mainstream universities, which offer a remarkable product, given the resources that they have available.

Mr. Robert Jackson: On a point of order, Madam Deputy Speaker. I hope that Front Benchers will leave at least some time for Back Benchers to speak.

Madam Deputy Speaker: That point is well taken. Let us proceed with the debate as quickly as possible.

Dr. Howells: I take that point, Madam Deputy Speaker, and I shall be guided by you.

I would be the last person to imply that one would receive an inferior education from a university that used to be a polytechnic. My patch contains the university of Glamorgan, which is a superb institution, many of whose students live at home. The hon. Member for Harrogate and Knaresborough makes an interesting point. If many thousands of students decide that they want to live away from home, it throws up questions about the financial model that he talks about.

I shall deal briefly with the Conservatives' proposals, although I should have liked to deal with them at length. Perhaps we will have an opportunity to do so at some stage in the future. The Conservatives have said that they will keep our income-contingent repayment scheme. We need to follow the logic of that carefully, to see how income-contingent repayments would work with high interest rates. Income-contingent repayments are not like a mortgage. How much one pays in regular monthly payments depends on what one earns, not what one owes. People pay in proportion to their income above a threshold. So if someone is on low earnings, their repayments are low. If someone earns less than the threshold, the repayments stop altogether. That means that the loan takes longer to repay. With our system, that is not a problem, because the interest we charge just matches inflation. It does not matter if someone takes longer to repay: they only ever repay what they borrowed in real terms.

However, with real rates of interest, it is very different. If someone takes a long time to repay, because their earnings are lower, the interest racks up and they pay back a lot more. If someone takes a career break, perhaps to start a family, the interest really begins to mount up. Two years ago, we exemplified some revealing case studies for the Education and Skills Committee and I hope that hon. Members will take a look at them. If interest rates were about 8 per cent., a low earner with a £10,000 loan who took a career break could easily have to repay £60,000, or six times what they borrowed. In contrast, a city earner with high earnings and no career break would repay just £15,000. It is hard to see how that is fair.

Under the Conservative proposals, where would the money come from? It would not come from high earners. They would repay their loans quickly, so the burden of high interest rates would not fall on them. In fact, the extra money would come from medium and low earners, especially anyone unfortunate enough to take a career break. They would take the longest to repay and thus would bear the greatest burden of that policy. What impact would that have on widening participation?
 
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Greater interest rates would mean greater risks for the individual. Those less sure about entering higher education—the very ones we are encouraging to think about it—would be put off in their droves.

Do the Conservatives' sums add up? We have identified at least three serious holes in the arithmetic. They have underestimated by £400 million the likely fee income by using data from 2003–04 instead of estimates for 2009–10. They have underestimated by £300 million the income lost the to the Exchequer if the student loan debt book is given away. Nor do the Conservatives' proposals make any provision to deal with the unfortunate consequences of high interest rates, and the cost of writing off loans for policy reasons. That is not tenable, and putting it right could cost another £400 million. So the Conservatives' sums are out by as much as £1 billion a year. Their new policy is grossly unfair, and the sums do not add up. I shall leave for another day the question of whether the Conservatives' proposals are actually feasible to implement. We have two different proposals from the Opposition parties, but as I said at the beginning, neither is a practical alternative.

Everyone in this House knows and values the contribution made to national life by Lord Dearing. He has done great work in education for this and for previous Administrations. All have valued his independent approach. His committee of inquiry on higher education, in 1996 and 1997, espoused the principle that students should contribute to the cost of their higher education, and that led us to the introduction of fees in the first place. I remember it well because I took the Bill through the House and, temporarily, I was the most hated man in Britain. I am sure that someone took over from me fairly quickly. The logic of that conclusion is as strong today as it was then, if not stronger. Students should make a contribution, but it is better if they do so as graduates, and that is what our fee deferral plans allow for. Of course they must also contribute in a fair and affordable way. That means avoiding the shockingly regressive proposals from the Conservative party, which would have those who benefit least from their higher education paying the most.

2.16 pm

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