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Despite the Minister’s assurances, many graduates now struggling to pay back their student debt on what are often quite low new graduate salaries remain concerned that the selling of the debt to a private company could be a precursor to raising the interest rates to commercial levels. I am pleased that the Minister denied that point on the record, but I wish that he would include it in the Bill, to reassure students who are likely to have their debts sold off in future, and graduates, who will be affected by this change.
Graduates already face a hike in the interest rates on their loans this year. The rates have doubled to 4.8 per cent., as the hon. Member for Great Grimsby (Mr. Mitchell) mentioned, from 2.4 per cent. last year, due to the slightly bizarre way in which the Government calculate interest rates for student loans. It is not just that they use an entirely different inflation figure for students from the one they use for other purposes, but the rate is not even averaged over the year. It is set arbitrarily on the basis of one month in March. If that month happens to be one in which oil prices are running high, and there are hikes in utility bills, for the rest of that year students will pay the cost in their interest rates. Students are concerned that this is the beginning of a domino effect. They saw fees, then top-up fees—and may assume the raising of the cap—and then the introduction of commercial interest rates. They would welcome the sort of assurance that I mentioned—the Minister including something clearly in the Bill to demonstrate the Government’s future intentions. They can always amend it later. We have seen plenty of amending legislation from the Government in the past 10 years.
The Minister is adamant that although his Department is leading on the Bill, it is not about higher education and will have no effect on students or universities. It is merely a short-term tactic to raise immediate revenue for the Treasury and to offload risk on to someone else. If we are to accept the Government’s argument about offloading risk, are we sure that anyone would want to buy the student loan book? The loans are riskier than the mortgage-style loans that were sold, and it takes longer to pay them off. They were income contingent, so if income levels drop the loan repayments will dry up. Any investor would be gambling on the future of England’s economy.
Mr. Hayes: The hon. Lady and I broadly agree, but she is on slightly shaky ground with her last point. I suspect that the opposite is true. The loans would be a relatively secure product to buy. The risk is spread widely and the record of defaulting is small. I would think that they would be an attractive proposition. However, the hon. Lady made a good point about when they will be sold, to whom, on what time scale and in what chunks.
Sarah Teather: Let me develop the point. What about those students from the European Union whom we have discussed? That is especially relevant as more students move around. What happens if students move abroad? Are they more or less likely to default? With a free market in higher education across Europe, are we sure that such loans will always be a secure investment? I am not quite so sure. Those points need to be explored.
What requirement is there for HMRC to pursue those students who fail to pay back their loans? If the buyers of the student loan book are to rely on HMRC’s competence to realise the value of their purchase, this week will have fatally undermined the price of the assets on offer.
The hon. Member for Great Grimsby referred to debt bundles, and he made a good point. With the lack of liquidity in the financial market today, there is a serious question about whether any bank would want to take on the risk of buying the student loan book. If banks are loth to invest at the moment, there is a risk that the Government will have to sweeten the deal heavily to interest buyers.
A number of hon. Members have asked how large a discount the Government will need to give to investors and what proportion of the book they will sell to raise the £6 billion. The Minister has consistently said that he cannot answer because that would reveal all the Government’s cards to investors, but the cat is out of the bag. We know that the Government’s finances are tighter this year and that there is a greater squeeze on spending. Selling the student loan book under those circumstances is rather like advertising on lastminute.com: “The plane leaves in 24 hours, all tickets must go. Any price accepted.” We should perhaps be a little concerned that there is a risk that the Government will put in far too great a sweetener, which would lower what is good value for money.
How will the Government decide what is good value for money? How will we know what they have done to establish that? If the Government do not reach a deal that is good value for money, will they postpone the sale, or proceed anyway? They will need to receive a capital amount to balance the books this year. The Tories did at least postpone the sale in 1996 when they failed to obtain a good price for the taxpayer.
The problem is that the Government’s record is not good. The forthcoming National Audit Office report on QinetiQ, which we expect to be published tomorrow, is a prime example. A large stake in the defence firm was sold at rock-bottom prices to the Carlyle group and then floated on the stock market, which made the group a hefty £300 million profit. That is a prime example of what happens if we do not ensure that we get value for money at the time.
If the Government succeed in selling the student loan book at a level they believe to be fair, will they undertake to report to the house on the details of the sale before proceeding with further sales? That is the point that my hon. Friend the Member for Harrogate and Knaresborough (Mr. Willis) made when he asked the Minister to put on the record the discounted rate for the previous sales. I accept that we will not know all the details before the sale, but if the House is to have confidence in what the Government are doing we need to know the success rate that they have achieved so far.
From the investors’ point of view, it is not clear how they will know exactly what they are buying unless the Government intend to release much personal data about the loans. The Minister said that all the information for potential purchasers would be anonymised, but I cannot understand how investors could genuinely appreciate what they were buying without knowing far more about those who owe the debt. That raises concerns.
What will happen if students default on their payments? The hon. Members for South Holland and The Deepings (Mr. Hayes) and for Great Grimsby asked about that. Will HMRC pass on information about individuals to the new owners of the debt? What data will be passed to them? What safeguards will be in place? Will HMRC or the new loan owner be responsible for chasing up those who default? How will the relationship work? How will the data be transferred? I presume that the Minister does not want the Opposition to give him details of a reliable courier company, and that a better system will be used in future. There was some hubris in the Government’s reference to their intentions on data protection in the Q and A that the Department released. I suspect that no hon. Member will be as ready to accept the Government’s reassurances about the matter now.
What will happen when the initial purchaser sells on the debt? The hon. Member for Daventry (Mr. Boswell) made that point in interventions. Are the Government genuinely saying, as the Minister told me in private, that they will undertake to draw up a new agreement and contract with any new purchaser, all the way down the line, regardless of the way in which the debt is broken up, the number of people to whom it is sold on and whether it is sold here or abroad? What data protection will be in place as the debt is passed along the chain?
The Government trespassed on principle long before we reached this point, when they decided to impose large debts for higher education on students just as they start out in life. There are few points of principle in the Bill, but it contains several holes that leave graduates in uncertainty. I hope that the Minister will turn his mind to them in Committee. However, for now, we are content to let the measure through.
3.46 pm
Mr. Tim Boswell (Daventry) (Con): We are nearing the end of a bad week in Parliament for the Government. However, at last a Bill has come along that we can describe as reasonably sensible. It will have my support today.
I have a circumscribed role in higher education as, first, a member and officer of the all-party university group and, secondly—the Minister and certainly the hon. Member for Brecon and Radnorshire (Mr. Williams) will be interested in this—a relatively newly appointed governor of a Welsh higher education institution. We shall watch that interface with interest.
However, given that it is more than a decade since my service as a Minister with responsibility for higher education, it is not appropriate for me to debate contentiously or dilate on details of the past. I can say fairly that I floated the idea of doing something along the lines that the Bill suggests and that I have supported the principle of doing so ever since. I welcome the widespread consensus that has been achieved on that. If we consider the reasons for not doing that at the time, it is fair to say that, in the early days of student loans, there was less experience of the repayment compliance. Since then, there has been greater refinement of financial instruments and, perhaps most importantly, the underlying asset has escalated in value. The asset, allowing for another year’s issue of loans, would now approach roughly £20 billion. That is four or five times the value of a decade ago.
However, the Bill is essentially a Treasury measure. It is not about the Department for Innovation, Universities and Skills or about education. It needs assessing for its economic impact and, as several hon. Members who contributed interestingly said, the critical issues are the conditions and timing of any sale that the Treasury makes or drives. There is no more explicit disclaimer of the Department’s involvement than that in paragraph 42 of the explanatory notes, which states:
“No aspect of this Bill will create a material impact on borrowers, higher education institutions or employers.”
If that is the case, one is driven to wonder what on earth the Minister, much as I like and respect him, is doing discussing the Bill. Where is the Treasury, which is in effect controlling the legislation? However, we are pleased to see the Minister here and he explained the Bill very well.
The Bill’s primary importance is economic, although there may be secondary implications for students and the sector. It is clear from this week’s events that even if—this would be an impossible task and I do not anticipate that it will take place even in the near future—the Government could sell off, at one gulp and at an early date, all the student loans, the total proceeds would fall below the total amount of current Government lending to Northern Rock. In a sense, things have not gone down the pan, but that is at least the scale of the commitment.
It is perfectly proper for Ministers, whether Treasury Ministers or Education Ministers, to say that the sale of a loan as a Government asset—a loan is of course an asset—is an alternative to further Government borrowing. Indeed, doing so may introduce some welcome flexibility in the Government’s financial affairs. I have no difficulty with that. However, my hon. Friends and others are right to say that we are entitled to ask the Minister to give some indication of the deal that his Department has done to recover the proceeds from the Treasury. For example, are we talking about an enhanced capital programme for higher education institutions? If we are, will it be a genuine enhancement of the resources available to higher education or will it merely be a substitute for others that would have been available?
Those are general questions about the Bill. There are also some interesting technical questions that are worth probing more in Committee and to which a number of hon. Members have already referred in interventions or speeches. There is an interesting and essential tension between the number and nature of the safeguards available as far as student confidentiality is concerned and the number of players involved. Ministers have rightly fallen back on the overriding guardianship role of the Secretary of State. It is worth noting that the Secretary of State’s obligations are set out clearly in paragraph 15 of the explanatory notes. I should make it clear that those obligations fall on him, and are not demitted to individual civil servants, whether senior or junior.
One of those obligations is to ensure that correct repayments are taken. A second one is to protect borrowers’ personal data and to make arrangements to allow borrowers to discuss issues that have arisen in the course of their borrowing. Those are entirely proper public functions that sit with the Secretary of State. We cannot have arrangements that are seen to muddy those responsibilities, either within the Department or with regard to the subsequent control of the loans.
I mentioned this in an intervention, so I will not speak about it at length, but we know from the history of collateralised debt obligations that loans can easily be, and in fact are likely to be, chopped up and repackaged, and can involve a large number of players, some of whom, even if we know who they are, are likely to be outside the jurisdiction of this country and the Secretary of State. At best, when all those people are involved, sensitive data can leak. Indeed, there will be people looking for that to happen, perhaps in order to relate the names to other credit references that they may have. At worst, the data could be actively abused. At any rate, it is clear that the audit trail is bound to lengthen unless it is controlled.
The next issue is the nature of the risk being transferred. In a sense, that is as long as a piece of string, and whatever risk is being transferred will have to be made explicit to potential purchasers, who will make their own judgment on it. If we consider the old mortgage-style loans, we will remember that there has always been provision for mortality—which, sadly, occurs—and for other non-repayment because the conditions had been fulfilled for writing off the loan after a finite period of years.
I have some sympathy with the comments of the hon. Member for Brent, East (Sarah Teather) about this matter. There are now issues about the susceptibility to changes in economic conditions and the potential for default. I hope that the Minister will say something about the experience of active default as opposed to the writing off of a loan under permitted conditions in the existing arrangements.
The Minister and I have previously debated the merits or otherwise of the old mortgage-style loans that I used to operate, and I do not want to reopen that debate. I am certainly not saying that we should bring them back now; we move on. However, for borrowers, the terms and obligations attached to those loans were fairly clear. That might not be the case with income-contingent loans, not least because the level of income might not be clear.
I say to the Minister—as I would say to his Treasury colleagues if they were supporting him on the Front Bench today—that if one is prepared to take a big enough discount, anything, even a sub-prime mortgage, can be got away at a price, but it will only be a severely discounted one. I believe that the Minister is right to keep his powder dry, despite the blandishments of the Liberal Democrats, about the precise conditions under which he is going to sell. I would be the first to complain if he engaged in a fire sale of this very valuable asset. However, he needs to know what he wants to sell, and purchasers will need to know what they want to buy.
This brings me to a further issue. I am sorry if this point is something of a King Charles’s head for me, but I make no apology for repeating it, because I believe that it is important. There is the potential—not the actuality—of a scandal in the making over the question of outstanding student loans that are outside the Secretary of State’s jurisdiction. The Minister has been perfectly reasonable and reassuring in relation to loans within the British envelope. Most people pay PAYE, and most student loans are recovered through Her Majesty’s Revenue and Customs. We understand from what the Minister has said today that, thank goodness, there has been no breach of security in that regard. We accept his assurance
and we are pleased about it. However, a significant minority of loans are given to qualifying persons who are not British nationals, including European Union students and those from within the European economic area, and to British nationals who subsequently become resident abroad and do not pay UK income tax.
The convenient arrangements involving recovery through the Revenue do not apply in those cases. As I understand it, the Student Loans Company is responsible for the collection of those debts, in accordance with the rules. Incidentally, it is also responsible for any voluntary payments that people might make to wipe off their debts, which is welcome. The Minister should tell the House whether there is a material sign of any differential impact between home graduates, if I may call them that, and those resident overseas. I would not be surprised if there were growing evidence of default by those who have passed outside the range of the Revenue and are now difficult to pursue. Without wishing to make a derogatory remark, I must point out that this is similar to the problems of enforcing judgments against foreign drivers, for example.
The Minister needs to take this issue seriously. If word gets out on the street that someone can take out a student loan in the United Kingdom—we are obliged to offer it—but that they do not need to pay it back because they have moved out of the system or because they are a Brit who has moved abroad, in effect to escape from the loan, that would be very bad news. It is disadvantageous to our own resident students, and it makes less money available for other public purposes in the long term. I hope that the Minister will say something about compliance in the context of foreign-resident, as opposed to home-resident, graduates.
This will obviously be a Committee point, but I think we should consider whether purchasers will be obliged to take a proportion of accounts of persons who are resident abroad as part of the package, or whether it is conceivable that a separate package might be offered consisting of persons who are exclusively resident abroad—Student Loans Company cases, rather than Her Majesty’s Revenue and Customs cases.
Perhaps the Minister will allow me a hypothetical example which I think is at least worth considering. If a Lithuanian bank felt able to secure a package of loans extended only to Lithuanian nationals who had come to the United Kingdom to study, and then to attack them under Lithuanian debt laws and get a faster rate of return than it would by going through the front door—in other words, the Student Loans Company—that would be a differential and might even attract some concern in Europe. If nothing else, it should be considered whether there is any distinction in practice that makes the position of students either easier or more onerous depending on whether they are resident in the United Kingdom or abroad—whether as an English, or British, national or as a foreign national—that would amount to a loss of that famous and desirable concept, the level playing field. To put it simply, it would not be fair.
Although the Bill is narrow, a number of Members have referred to some of the wider policy contexts. As we are lucky enough to have an Education Minister present, I think it reasonable to make a few brief comments of that kind.
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