Education: Treating Students Fairly (Economic Affairs Committee Report)

We put forward a number of reasons. For example, other qualifications are perceived as inferior by students and parents. This is not much helped by schools, which are incentivised to push students towards sixth form and university. In particular, an apprenticeship should be viewed by young people and society as just as valid as the academic route. The Government admitted in their response to our report that more could be done in schools to improve information on post-18 options—I pay tribute to my noble friend Lord Baker for the wonderful work he has done in encouraging vocational and technical education in our schools. Employers are increasingly requiring applicants to hold degrees regardless of the level of skill the job requires.

We believe the main reason comes down to one thing—funding, and, in particular, the funding reforms for higher education that the coalition Government enacted in 2012. Tuition fees rose from £3,000 a year to a basic level of £6,000 a year, with institutions able to charge up to £9,000 a year if they agreed to widen access. Before the reforms, the income of the universities was split roughly half and half between tuition fees and government grant, whereas now the vast majority of university income is from the higher tuition fees. Given that funding therefore follows the student, it is unsurprising that almost all the institutions are charging the maximum permissible amount, which is now £9,250. This does not look like the competitive market the Government said would result from the reforms. The reforms, together with the removal of the cap on undergraduate numbers in 2015-16, have incentivised universities to recruit as many students as possible onto the most expensive undergraduate programmes.

These incentives may explain an area where there does appear to have been competition, albeit unwelcome competition: grade inflation. The Office for Students published a report last month which showed that, in 2016-17, 105 out of 148 institutions had an unexplained increase in the number of first-class degrees they had awarded, relative to expected performance across the sector from 2010-11. In 2016-17, 26% of students received a first-class degree, up from 18% in 2012-13. To take one example—there are many of them—the University of Surrey awarded half of its English-domiciled students a first-class degree in 2016-17, up from 23% in 2010-11.

The committee was not, however, convinced that a more competitive market was the only intention behind the 2012 funding reforms. We believe the changes were motivated mainly by a desire to reduce the deficit. Tuition fees are paid through student loans. Expenditure on student loans does not count as current government spend in the national accounts, unlike the teaching grant, which does. This difference in the accounting treatment meant that George Osborne was able to perform the most extraordinary magic trick, appearing to increase spending by £3 billion in 2012-13, compared to 2011-12, while reducing the deficit by £3.8 billion at the same time as the proportion of funding from tuition fees increased.

This sleight of hand—for that is what it was—was possible despite the fact that a large proportion of student loans will not be paid back. The Institute for Fiscal Studies estimated that around half of the value of student loans issued in 2017-18—around £8 billion—would eventually be written off. These write-offs will of course show up in the deficit only in 30 years’ time, by which point the student loan book, which will have to be written off by the generation who are paying tuition fees and taking out loans, will be an astonishing £1.2 trillion in nominal terms.

The very high interest rates on student loans together with charging it now before even graduation has taken place, from the moment students enter the institution, at a current maximum of 6.3%, was part of a plan to reduce the deficit, despite its presentation by the Government, wrongly, as a progressive measure, since they argued that only high-earning graduates would repay all the interest. I am disappointed to see that, despite our report, Ministers are still saying that this system is progressive. In our report, noble Lords will find an example of a man who goes to work in the City as a lawyer compared to a man who works as a nurse. Who ends up paying more? The nurse—because the very high interest rate compounds, and the people on higher wages pay the loan down more quickly.

Under national accounting rules, the interest on student loans is counted as income as it accrues. The Office for Budget Responsibility said this accrued interest was worth £3 billion in 2017-18 and would rise to £7.5 billion by 2022-23. It said that, as much of the interest will eventually be written off rather than repaid, the national accounting methodology,

“does not reflect fiscal reality”.

That was the Office for Budget Responsibility. The full scale of this fiscal illusion was made apparent by further work it carried out, which was published after our report. It said that, when the write-offs on student loans begin to hit the national accounts in the 2040s, they will be more than offset by the interest accruing on larger loans taken out by later cohorts. It described this as a “pyramid of fiscal illusions” and said that, as long as the student loan system persisted in its current form, it would always flatter the deficit, despite the system barely breaking even in cash terms.

We recommended that, to reflect reality, the write-offs on student loans should be recognised up front. We were pleased to see that the Office for National Statistics has acted upon this recommendation. It said last month that, due to the scale of expected write-offs, student loans did not fully meet the criteria of loans as defined in European accounting rules. The classification of student loans will be changed so that the proportion expected to be written off is treated as a capital transfer rather than a loan. It intends to introduce this change from September this year. The change will also address the accrued interest illusion, as interest will not be charged on the part of the loan that was created as a capital transfer. The interest recorded as government income accrues only on the part of the loan that is expected to be repaid.

This provides a splendid opportunity, in the interests of treating students fairly, of reducing the interest rate to the 10-year gilt rate, at about 1.5%, thus reflecting the Government’s cost of borrowing. The Office for Budget Responsibility estimated that the new accounting approach would have added £12 billion to the deficit in 2018. It was quite a turnaround from the Office for National Statistics, which told us in January last year that student loans met the definition of a loan for national accounting purposes. Its change of heart appears to have been prompted by the committee’s letter to Eurostat, proposed by the noble Baroness, Lady Bowles, who understands these matters. It was Eurostat’s response to us which suggested that student loans did not fully meet the definition of a loan that appeared to stir the Office for National Statistics into action.

Funding for universities, masked by the fiscal illusion, has increased in recent years, but funding for further education has decreased. The Department for Education told us that funding for further education decreased by £1.6 billion from 2014-15 to 2017-18. Further education is, however an important route into higher education for those who do not pursue an academic route, but with low demand for some vocational courses, many colleges are unable to afford the cost of putting courses on. We said that the Government should explore restoring some teaching grant to further education colleges so that they can cover costs and stimulate demand for courses at levels 4 and 5.

With the accounting changes, there will no longer be a false choice between spending in post-school education that registers in the deficit and spending that does not. A proper debate can be had over where public money is best spent. As a starting point, we called for tuition fees to be frozen at £9,250 for the medium term. To assist with the debate on funding, we also recommended a single regulator across all higher education at levels 4 and above and a single regulator for all other post-school education at level 3 and below. The regulator for level 3 and below should have the equivalent status to the Office for Students, with sufficient resources and credibility to champion further education.

Our report is an appeal to the Government to treat students fairly by ensuring equal treatment and sustainable funding for all forms of higher education. This would help to create an even system of post-school education in this country that will support the economy by ensuring that we develop the skills we need and, most importantly, allow all our people to maximise their potential. I beg to move.

The second area I turn to is maintenance loans. In the course of our inquiry, we invited students to talk to us about their current preoccupations—a very useful and enjoyable exercise. I think we were all surprised that the main source of anxiety was not tuition fees but the maintenance loan. In many cases the loan amounts now available are significantly less than the cost of accommodation and basic necessities. For example, the maximum loan for a student in London is £8,430. There are London halls of residence where the basic charge is more than this. In any case, the system is regressive. The IFS calculated that students from the poorest 40% of families will graduate with an average debt of £57,000. Those from the richest 30% will owe £43,000. The difference was entirely due to the maintenance loan entitlement and the accrued interest. We recommended that we reinstate the pre-2016 system of means-tested grants and loans and that the total sum available to students be increased to reflect their real cost of living and be consistent across all post-school education, regardless of method or place of study.

The final area I will briefly discuss is the tuition fee loans, which—as the noble Lord, Lord Forsyth, said—we recommended be frozen at the current level of £9,250 for the medium term. There are reports that the Government may be thinking of reducing the fee to around £6,500, but who would benefit from this fee reduction? Certainly not the least well off. A London Economics study in 2018 found that if the fee were reduced to £6,000, say, loan repayments in the bottom five deciles would be unchanged and only wealthier undergraduates would benefit. This was because many lower-earning graduates will currently pay nothing, or close to nothing, in loan repayments over their lifetimes. But the HE sector itself would suffer a drop in income of over £3 billion. This sector contains an astonishingly disproportionate number of outstanding institutions and as a whole is a critical engine of growth in the knowledge economy and in the economies of many of our towns and cities. The Treasury would have to step in.

But does there exist a way in practice to defend direct Treasury funding from other calls on the public purse? Past experience shows that it is extremely unlikely that universities would compete very successfully for highly contested public funds. They would, I am afraid, be losers—so, in particular, would lifelong learning and part-time students on whose upskilling and retraining we must increasingly rely. I urge the Minister to recognise the great danger in such a reduction in tuition fees and to focus reforms instead on the proper provision of lifelong learning, the introduction of realistic means-tested maintenance grants and loans and a reduction in the absurdly usurious interest rates the Government currently charge.

My third point is that I became convinced that the case for reinstating the system of means-tested maintenance loans and grants, abolished in 2016, is absolutely overwhelming. If you are interested in helping people from a disadvantaged background, that is even more important than changing the interest rate on student loans. I need say no more about that because the noble Lord, Lord Sharkey, already has.

The final point that struck me was on apprenticeships. I was already aware that several large firms with well-developed apprenticeship schemes of their own were ignoring the government scheme. They are just paying the levy and treating it as a tax, and not bothering with the rigmarole of acquiring vouchers exchangeable for courses provided by recognised providers meeting nationally determined standards. The system was, and still is, seen by some of our biggest industrial companies as just too complex and bureaucratic: the game is not worth the candle. I think the whole committee was shocked to find out how slow and cumbersome was the process of agreeing the standards for such courses.

Apprentice numbers have gone down since 2015, when the target of 3 million by 2020 was set, and that target was pretty meaningless because it was framed in terms of apprenticeships started rather than completed—40% are not completed. It also does not distinguish between one-year and three-year apprenticeships. We concluded, therefore, that it encouraged the rebadging of training that should not be described as apprenticeships, such as MBAs at business schools—and here I apologise to my distinguished noble friend Lord Burns. For all these reasons, we were convinced that the target should be abolished immediately. In the Government’s response—which was, as I said, a bit bland and cursory—that recommendation was completely ignored. There is nothing in the response in answer to the central recommendation that the target which is driving the apprenticeship scheme at the moment—and driving it in a number of wrong directions—should be abolished immediately. I hope that the Minister will provide some answer today.

The threats to universities posed by Brexit and immigration policy are well known, and our universities are world-leading and vibrant. But the state of the rest of the higher education sector—the poor relations—is much less well known. We need to crack the productivity problem, improve workforce skills and invest much more, absolutely and relatively, in the rest of the sector—in further education, in flexible, part-time, mid-career and technical education, and in real apprenticeships—and return to maintenance support for those from less wealthy backgrounds. To create or restore parity of esteem requires not just words but action.

The second recommendation I support concerns flexible learning. Higher and further education institutions should work closely together and with employers. It is important to get employers involved with this. Some universities do and some do not. Sheffield Hallam is particularly good and employability is at the centre of its drive. It is looking all the time for possible jobs for its students and works closely with employers. At our colleges, employers not only have control of the board but have to produce projects for the students to work on and provide apprentices. So we need employers working with higher education institutions.

The other recommendation I strongly support is that the Government should have a clear plan for degree apprentices within its broader HE policy. This is critical. Universities are beginning to toy with degree apprentices—I put it no higher than that. They are experimenting; it is new for them and they do not quite know how it works, but it is essential.

I agree with all the comments made by my noble friend about there being too much academic humanities education in our country today, where we have graduate unemployment and graduate underemployment. We have to improve technical education throughout the school system. It is depressing to realise that every attempt to improve technical education in our country since the great reform Act of 1870 have all failed. I hope UTCs will buck the trend.

On degree apprentices, I have come across a university in Stuttgart, Baden-Württemberg, which has only degree apprentices. Consider that for a moment. The students do not apply to go to that university; they are placed there by their companies, which pay them a salary to study there. In my view, this is a revolution, and I am going to visit Stuttgart to see how it works. The scheme is quite large—I think it has 3,000 students and covers engineering, quantity surveying and law. I am going to see whether it would be possible to create such an institution in our country. It would be a rather sophisticated form of a polytechnic if I could get it off the ground, and it is a very interesting idea.

Today, more and more youngsters will want to take technical education and technical degrees because that is where the jobs are. Two youngsters in our village both got first-class degrees—one in English from Oxford and the other in philosophy from York—and they are doing part-time, rather low-paid jobs. This is not what our education system should be producing. We should produce youngsters who are needed by the economy and could earn very high salaries. We should not forget that to be a higher apprentice at 18, you must have one A-level—not a mass of them—usually in maths or physics, and a BTEC extended diploma. Companies will then pay you £20,000 a year to study in further education. The Navy is so short of people that it pays 18 year-old students £32,500, and we provide many of those students for the Navy. This reflects the greatest need, and this is where we have to change radically our country’s education policy. I congratulate the committee on stimulating this debate.

That brings me to my second point, which concerns apprenticeships. Most non-graduates want to gain their qualifications on a part-time basis, earning at the same time as learning. This has always been one of the main avenues of social mobility in our country. I find it extraordinary that when people lament the decline of social mobility, they do not point at the correct reason for it, or certainly one of the key reasons. The top challenge for apprenticeship policy is to expand the number of apprenticeships up to level 3. Degree apprenticeships are of course a great idea, but it is even more important that we have apprenticeships at lower levels for as many people as possible so that there is a seamless path all the way up the part-time route, similar to the one that exists along the full-time route. Just to ram home the point: I had the privilege of working for the Robbins committee when I was young and the Robbins principle was that everyone qualified to proceed to the next stage should be able to do so. That is what we have done with the academic route but we have never done it with the vocational route; we should be doing so.

To build a system where this is possible will require a lot of leadership. We are talking about a massive change in the way we do things. At present, this sector has little clout and gets pushed around at will. It needs an organisation to champion it. That is why our committee proposed a council that would champion the sector. For the council to have clout it has to be a channel for the money: it should be a funding council for further education and for those apprenticeships not funded through the levy. It also needs to be responsible for generating enough apprenticeships for non-graduates to provide the seamless route that I am talking about.

The elite of our country is challenged as never before in recent times. It is charged with ignoring the needs of ordinary people. There is no area in which this neglect by the elite has been as shocking as in our approach to the post-school education of half our population—those who do not go into higher education. I hope the Minister can tell us how the Government plan to address the three proposals that I have mentioned: first, an uncapped system of further education; secondly, a seamless system of apprenticeship with special emphasis on the lower levels; and thirdly, a funding council for further education and apprenticeship.

Can the Minister assure us that these topics will not be at the bottom of the list but will be priorities in the Government’s review? They are so important to the national interest. Can he assure us that this sector will not, yet again, get the short end of the stick?

Basically, the attempt to introduce competition and market incentives into this sector, while having some good results, has produced a number of unintended consequences. The fee cap has meant that almost all courses are priced at the maximum; competition has been almost entirely in terms of numbers of students rather than price or the quality of teaching; there is concern about too little attention being given to entry qualifications; and of course there is the point that has been mentioned about the considerable inflation in the class of degrees awarded. All these are things that we should be looking for ways to correct.

At the centre of many people’s concerns is the feeling that for many students the returns from studying for a degree might not be what they had hoped, while at the same time the non-degree part of higher education is being financially starved. The committee’s report presents a set of proposals. We have already heard about a number of them today and I shall mention two or three. First, if we are to increase the attractiveness of alternatives to the standard three-year degree, we have to incentivise both the institutions offering them and the potential students. As the noble Lord, Lord Sharkey, outlined, the proposals that we have presented are to provide more funding for other post-school options; to have a single system of funding, including loan funding and maintenance support for all full and part-time courses; and to have a single regulator.

My second point is that there is clearly a case for ironing out some of the problems with the funding system that are causing the most unhappiness for students. We spent a long time having meetings with students and talking about their experience. Without a doubt, the two issues that came up time and again were the level of interest rates on student loans and the need for those to be as recognisable as other interest rates, and switching maintenance loans back to maintenance grants so that poorer students did not end up with the largest debt.

My third point is that we should make a change in the transparency of what is happening with the loans that will not be repaid, and how this appears to both government and students. The noble Lord, Lord Forsyth, explained about the ONS decision to change the arrangements for how the write-off fees are recorded in the national accounts, and that change should lead to a more transparent treatment of loans in the public accounts. The expected write-off of student loans will now appear sooner, and we believe that over time this is going to lead to better decision-making in how resources are allocated.

However, I would personally like to see an attempt to apply a similar treatment to the amounts that are owed to students. Students who are likely to be on lower incomes after graduation now have a much more informed view of the income-contingent loans system than they did at the outset but they are still saddled for years with the existence of a large and growing outstanding debt, even if it is to be written off after 30 years. There is no doubt that this is extremely disheartening for many. Just as we want the Government to recognise the likelihood of debt write-off on an ongoing basis rather than waiting for 30 years, my own suggestion is that we should be looking for an arrangement that writes off part of this debt for the student on an ongoing basis as it becomes clear that it is not going to be repaid. That is not straightforward but I am sure there are ways that it could be done. It would make the whole process more transparent from the point of view of the student and the Government, and it would considerably reduce the levels of anxiety among many students.

If I may say so, there is a similar ambiguity in references to technical skills. I am a great admirer of the work of the noble Lord, Lord Baker; these skills are incredibly valuable and this is clearly one of the weaknesses of our education system. This is a result of the grotesque decision that so many young people have to take when they specialise at the age of 16—wisely, this does not happen in the Scottish system. As a result of this, far too many young people give up maths at the age of 16, even though this is of such fundamental value, almost regardless of what they do in the modern world. Sometimes technical skills are talked about as if you could not possibly have a technical education at a university. That again ignores the very valuable role carried out by many of our universities, often the less prestigious ones. If you go to the University of Teesside or the University of Sunderland, you will find they deliver automotive engineering courses absolutely aimed at the requirements of the Honda and Nissan factories nearby. You will find exactly the same at the University of Coventry and Oxford Brookes, linked to Jaguar Land Rover and the Formula 1 motor-racing industry. Those young people are getting a technical education in automotive engineering at a university.

What is the problem with that? Is it that we like what is happening, but we do not think it should be called a university education? It would be called a university education in America. In Germany, the technical high schools which deliver this type of education are in the process of gaining university titles. Treating those institutions as though they do not merit the title of university would be a mistake. It is far better to recognise that technical education happens in many places —a good thing, too. Of course, those universities often take students from more disadvantaged backgrounds. We are very fortunate to have the Minister with us, as he has responsibilities across the DfE. I invite him to endorse the principle of a pupil premium in school education—that schools which take on students from more disadvantaged backgrounds require more funding—and to accept that it would be a very odd result if we tried to apply exactly the opposite principle in higher-education funding, saying that the less prestigious universities, which tend to take the more disadvantaged students, should be further punished by having less funding for their education. The pupil premium should be a coherent principle that applies across education.

Sadly, I will not be able to touch on the funding issue, apart from to say that my other frustration with the report is that paragraph 276 states:

“There should be no change to the repayment threshold, the repayment rate or the term of the loans”.

My view is that, in the technical language, the RAB charge is too high. I fully understand why the debate has opened up about the accounting treatment of the repayment of loans, because such a low rate of repayment is now forecast. It is perfectly possible to use this model and to apply the basic principle that the typical graduate should repay in full. Therefore, I was disappointed, especially looking at the hard-faced Treasury men who served on it, that the committee did not investigate options such as extending the repayment period and lowering the repayment threshold—in other words, bringing down the RAB charge, expecting more repayments.

I end with a political comment, thinking back to my time in elective politics. We have ended up with a system that has a very high interest rate and a very high repayment threshold. That is a terrible combination. Far too many graduates see their debt growing every year because of the interest rate. This is an example of the problems caused by the “policy-making by speech” crisis. In the run-up to the Prime Minister’s party conference speech there was a decision whether to change the interest rate or the threshold. The decision was made to raise the threshold. We should have a low-interest-rate—I completely agree with the committee on this—and low-threshold model where we expect graduates to pay back and not to face the pain of seeing their repayment obligations grow year after year.

This report is not about having an easy ride. Two of the most exciting things about the report are, first, that it is not a report about Brexit, and, secondly, that it is willing to say that there are things wrong with higher education and further education, and that some institutions should be abolished. How often has any Government set up an institution or an organisation and at some subsequent point said “We can abolish it”? Normally we just add another institution and another institution—so this is a remarkably refreshing report, and one that highlights a set of key interests. Like other noble Lords, I stress the importance of ensuring parity of esteem between vocational and technical education and undergraduate degrees.

The report notes that in the 1960s, only 5% of people went to university, and now it is 50%. That has a set of merits; one thing that has been missing from the debate so far is the purpose of education for its own sake. We have talked very much—maybe appropriately for an Economic Affairs Committee debate—about the economic side. But education does have a value in and of itself, and for some people, going to university has an intrinsic value that you cannot monetise. But does it have that intrinsic value for 50% of the population at 17 or 18, when they are filling out their UCAS forms? I suggest that it does not. I think that the value of higher and further education is about lifelong training. It is not about what you might do as a rite of passage at 17, 18 or 19. One of the downsides of the commitment to send half the population to university at 18 is that people are not being trained in the skills that are needed.

One of the issues—I am afraid that I am going to mention Brexit—is why we have so many EU migrants working in the United Kingdom. In part, it is because they have the skills and the technical training that the British education system has not provided. Whether we leave the European Union on 29 March or not, we need to rectify that. It is essential that this country has the required skills base.

There is also a question about the value of a degree. When I went to university, there was a premium. You were likely to earn more if you had been to university. That premium no longer exists in the same way, so the economic arguments that were put forward when we introduced tuition fees—and when they were raised—no longer apply.

The final thing I will say is about the importance of maintenance grants. Ideally, I would go further than this report recommends and suggest that means-tested grants be introduced without the loan component. That might not be financially affordable, but there is something perverse about the idea that if you are middle-class and your parents are wealthy, the better able your parents are to pay your university fees and ensure that you can live comfortably and pay your rent, the more likely you are to leave university with no debt, while those who may have the greatest aspiration, the greatest desire and who would benefit most from the transformational aspects of university life do not have the same opportunities because they are having to borrow money to subsist. That needs to change.