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Standing Committee H
Tuesday 9 March 2004
[Mr. Roger Gale in the Chair]
Effect of bankruptcy
Mr. Phil Willis (Harrogate and Knaresborough) (LD): I beg to move amendment No. 183, in
clause 39, page 18, line 18, at end insert
'provided that no such regulations may establish any person or body to whom a loan is outstanding as a preferential creditor'.
The Chairman: With this it will be convenient to discuss clause stand part.
Mr. Willis: I welcome you back to the Committee, Mr. Gale. I thank the Minister and the usual channels for allowing us to begin the afternoon sitting by briefly discussing bankruptcy. Although I hope that the debate will be short, it is an important issue to consider. From the outset, I say that this is a probing amendment and we will not ask the Committee to divide on it. I hope that we will receive a satisfactory response from the Minister.
The reason behind the amendment and for raising the issue of bankruptcy is that the whole Committee would agree that, whatever way we dress it up, future students will leave university with significantly more debt. We can call it an investment, but the reality is that, as far as the usual terms of financial prudence and credit worthiness are concerned, students will have significantly more debt.
We must recognise that, since 1992, the number of students filing for bankruptcy has significantly increased. In 1992, eight students filed for bankruptcy. By 1997, that figure had reached 77. By 2002, it had reached 276, and the latest available figures for 2002-03 show that the number has jumped to 899. There has been a huge growth in the number of students filing for bankruptcy over the last few years, and in particular in the last financial year.
The maximum that a student can borrow from the Student Loans Company is roughly £12,000, but under the proposals, that will rise to £19,650. That is a significant jump, and I am not including other debts that a student might have, which might increase with their debt portfolio. However, there is no evidence, despite the rapid increase in bankruptcy over recent years, that there are widespread plans for students to file for bankruptcy. There are roughly 1.8 million students in the system, of which 1.1 million are full time, and most of them take out some sort of loan. The fact that only a relatively small number of students file
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for bankruptcy is an indication that this is not a massive problem for the state to consider. Nevertheless, it is a problem all the same.
I flatly reject the views of the former Minister for Lifelong Learning and Higher Education, the right hon. Member for Barking (Margaret Hodge), when she said:
''Graduates should not see bankruptcy as an easy route to repaying the money they have borrowed through the generously subsidised student loans system.''[Official Report, 15 May 2003; Vol. 405, c. 13WS.]
I agree with what she said, but she is fundamentally wrong to suggest that students see bankruptcy as an easy way out of their debt problems. The reality is that students have significant debts. I say that because the penalties for filing for bankruptcy are significant, and the Committee should not run away with the idea that it is an easy decision for anyone to file for bankruptcy, particularly someone starting out on their career. It affects not only a graduate's credit worthiness, but their employment opportunities. It would preclude them from becoming a solicitor, chartered accountant, accredited accountant, architect, stockbroker, surveyor, and valuer for an auctioneer and from entering many other professions.
Jonathan Shaw (Chatham and Aylesford) (Lab): And an MP.
Mr. Willis: A discharged bankrupt can become an MP, but, as always, the hon. Gentleman makes a serious point, and we may return to it.
There is a pragmatic issue to address, but there is also a fundamental principle. In 2002, following the Teaching and Higher Education Act 1998, the Insolvency Service considered whether students should be allowed to file for bankruptcy. It decided that students should have all their debts written off if they filed for bankruptcy. Sections 251 and 252 of the Enterprise Act 2002 abolished Crown preference for the Inland Revenue and Customs and Excise by not allowing them to be preferential creditors for either company or individual bankruptcies. It is important that the Minister addresses that specific point.
The 2002 Act was not taken lightly by the Government, and the philosophy behind it was that bankruptcy should not be seen as a damning indictment of an individual's ability or business prospects but, as the Americans see it, as part of a journey. The 2002 Act made it clear that the traditional Crown preference for the Inland Revenue and Customs and Excise should be set aside. The Government did that not only for British law, but to come into line with much of European and worldwide law. Australia is often cited as an example of where the new student loan and top-up fee system has been successfully introduced. A significant number of its students have very high debts, and many file for bankruptcy, but the Australian state has been deliberately excluded from being a preferential creditor.
What is the justification for suddenly taking students out of the bankruptcy arena? They are being told that if they file for bankruptcy in future, they will have to retain any debt to the Student Loans Company
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and carry it forward to when they are discharged from bankruptcy. They will not have to take forward other debts, even those owed to people who were forced into bankruptcy as a result, something which often happens with small companies that have several unsecured loans. Will the Minister respond to that important issue?
The Government seem to be viewing students through the eyes of the right hon. Member for Barking, who is now the Minister for Children. She believes that students will leave university owing money to the Student Loans Company, file for bankruptcy in a cavalier fashion, go off round the world for a couple of years and eventually come back when all will be well. I do not believe that that is true, but it also belies the fact that the sort of debts that students will have in future will stay with them for a significant number of years.
All members of the Committee would accept that young graduates are unlikely to stay in the same job or career over the 25 years that their debt would stay with them. They are likely to move about. They are also far more likely to be self-employed than any other group of graduates in the history of our university system. It might be 10 years after they leave university, when they have started a business or been part of a business that they get into financial difficulties and want to file for bankruptcy. Are we saying that when people in their mid-30s get into that position and file for bankruptcy, they should be left with a significant debt to the Student Loans Company as a preferential creditor? That is fundamentally wrong.
My final point concerns the student debt portfolio itself. In 1997, when the Labour Government came into office, they inherited from their predecessors a provision to sell the student debt portfolio into the private sector. Hon. Members will know that one of the first pieces of legislation that the Government had to put forward was a Bill to sell the debt. It was unsuccessful, but it was part and parcel of Government policy to do that. It may be Government policy in future to sell all or part of the student debt portfolio into the private sector. In those circumstances, would a private bank that had bought the debt from the Government be a preferential creditor under the Bill? If so, it would put it in a very different situation to any other debt of any other individual or any other company in the United Kingdom. They are serious issues and I hope that the Minister can respond.
Chris Grayling (Epsom and Ewell) (Con): The hon. Gentleman has raised some important issues that should be aired in Committee. The Government's view should be set clearly on the record. I have a series of points that I would like to raise, and I hope that the Minister will address them. I share the hon. Gentleman's view that bankruptcy is a very serious step to take. Despite the reports of web-based communications going around the student cohorts saying that the best way to get out of fees is to file for bankruptcy, I do not seriously believe that, with the
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possible exception of a small number of graduates on the fringe, large numbers of graduates will declare themselves bankrupt just to get out of their student fees. The consequence of doing so for their professional lives would be immense.
The fact that the issue even arises reinforces the fact that many students feel intimidated by the debt burden that they are building up through both the existing system and to a much greater extent through the system that the Government propose. I hope that the Minister will not seek to portray this measure, whether right or wrong, as being simply a response to a tide among students of using bankruptcy as a way to get out of repaying their debts. I do not believe that most serious graduates would consider such as route.
There are two key considerations. One is the financial process that students or graduates will go through in the case of bankruptcy. The second concerns the Government's involvement as an active or passive creditor. Will the Minister give us his views on that?
On the process, if a student or graduate had, for whatever reason, reached the point of having to be declared voluntarily or involuntarily bankrupt, the individual would be subject to the regime of the insolvency courts and his finances would be tied up in the courts. The Insolvency Service, the relevant officer of the Crown or an officer of the court would set parameters for managing that individual's finances. Bank accounts would be frozen and so on, and he would be given a small amount of money to live on. That is the normal process for such cases.
However, at the same time, the clock would be ticking. Labour Members sometimes do not fully understand that the student loan structure is not about paying when possible, but about a deferred interest process. The interest rate this year is 3.1 per cent. Interest continues to accrue each month of each year that goes by, whether the individual is a student, a graduate earning less than the threshold, a graduate who has given up to take a career break, or a graduate who has gone bankrupt.