U.K. student loan scheme

Press, 14 July 1989, Page 8

U.K. student loan scheme

The man in charge of Britain’s education system, the Secretary of State for Education, Mr Kenneth Baker, is having more success than New Zealand’s Minister of Education, Mr Lange, in introducing a student loan scheme to shift the cost of education more on to tertiary students. TONY VERDON reports for “The Press” from London.

THE British Government is pressing ahead with student loans, even though it is running into the same political and administrative flak which sank the New Zealand scheme. While New Zealand bankshave refused to go along with the < scheme, their British counterparts have extracted enough Government concessions for the ; British scheme to proceed. * However, its detailed form has , still to be finalised, and political .commentators in London are predicting further bloody en- y counters between the Government, bankers, and students. They say the British Secretary of State for Education, Mr Kenneth Baker, is likely to be promoted out of the education portfolio before having to oversee the loan scheme’s introduction. Mr Baker has managed to get -much further with his proposals -than the Associate Minister of '’Education, Mr Goff, has with his. ;■ A skilled back-room politician, ,Mr Baker has rarely been 'goaded into public rows over his "scheme. To the obvious chagrin •of the wide range of groups opposed to the loans scheme in Britain, they have not been able to develop the momentum their case needs to bury the plans. The British Government’s v scheme is almost identical in its !' aims to the proposal which Mr Goff has now been forced to ditch. However, while the New Zealand Government wanted the banks to finance the loans (with a Government subsidy), the Brit- . ish Government is prepared to provide initial funding itself. Mr Baker, and his Secretary of State in charge of higher education, Mr Robert Jackson, have fought off attacks against their scheme from students, bankers, the Treasury, and even from some of the closest friends in big

business of the Prime Minister, Mrs Thatcher. >

The most surprising critic has been Lord Rayner, once Mrs Thatcher’s business-efficiency guru, who is chairman of the department store chain, Marks and Spencer. He said the loans schemes might "compromise the quality of our future medical workforce ’* Although Mr Baker and his colleagues have had to make concessions to the clearing banks, whose participation is obviously crucial to its operation, the British scheme is now certain to be .phased-in from October next year. r As was the case in New Zealand, the British Government turned to top-up loans as a means of holding the line on spiralling tertiary education fees. The. Baker argument is that students should contribute something towards the cost of their own tertiary education, and so relieve their parents and the taxpayer of some of the financial burden involved. Mr Baker also sees the student loans scheme as a key to achieving his Government’s aim of doubling the number of students in higher education without increasing public spending. In the United States, students borrow funds while studying, which are repaid after graduation, when the graduate is earning a good professional salary.

The plan in Britain, first mooted in a White Paper in November, was greeted with fury by student organisations, who almost immediately managed to mobilise thousands in protest at the plans. The strength of feeling among students took both police and the Government by surprise, and traffic in Central London was paralysed when students staged a sit-down outside the Palace of Westminster. Violence erupted, and scores of demonstrators were arrested. Although demonstrations have been held since, the Government has so far been able to virtually ignore the student discontent. Mr Baker’s scheme will be run by a private company, to be set up by the financial institutions. A major sticking-point in the negotiations between the Government and the British banks has been concern about the risks involved in making the loans. The same fears seem to have helped scuttle the New Zealand proposals. After eight months of negotiations, the British Government has just agreed that the banks will avoid the need to raise fresh capital by keeping the loans off their balance sheets. They will also avoid competition among themselves by establishing a collective organisation to administer the scheme. The banks are still pressing education Ministers for an in-

demnity against a change of Government or of Government policy. They are also negotiating the fine print of a contract which will guarantee them a rate of return above standard interest rates, in return for shouldering the scheme’s risk. After a confidential report prepared by the consultancy group, Price Waterhouse, the British Government is currently considering the degree to which debt collection agencies as well as banks will chase graduates defaulting on loan repayments, and what role employers of graduates will have in administering the scheme. Although neither the banks nor the Government will publish the Price Waterhouse report, enough of it has leaked to indicate the basic form of the British scheme. The report says the scheme “must provide an attractive rate of return for participating financial institutions.” That rate of return will have to be pitched at a level to compensate banks for their risk. “Essentially this is not a financial risk, but a risk that their reputation could be impaired by their involvement,” it says. Significantly, the report also advocates “careful marketing” to defeat student opposition to the scheme. The report notes that participating banks would want to keep the loans off their balance sheets and also that the banks had insisted on a collective approach. Initially, Ministers, like their counterparts in New Zealand, had hoped that the banks would bid against each other for the business. Both points have been met by Mr Baker’s agreement that the loans should be administered by an arm’s length company in which financial institutions would be able to choose to participate. The report discusses three possible ways of financing the loans company: the banks could subscribe equity, they could fund it through debt, or the Government could provide , the funds. Price Waterhouse recommends debt funding to eliminate tax concerns. However, Mr Baker and his fellow education Ministers are understood to favour the third option under which the Government would provide the funding directly. The new company will administer the maintenance Adans, on behalf of the GovernSment. In return it will receive a fee which will take account of administration charges and the .company’s success rate in recoWring the loans froip graduates. the time the scheme is fully .operational, more than a million

students will be eligible in any year for a loan worth more than SNZII2O on average in a full year. Students will be able to present their loan certificate to branches of institutions participating in the company or to the company itself. They will repay the loans in equal annual amounts, adjusted for inflation. The Government says the annual operating costs of the scheme will be SNZ29 million to SNZ4O million, or between SNZ2S and SNZ34 per student account a year in 1995, when the scheme is expected to be fully operational. Bad debts are estimated at about $l7 million in 1995. These estimates have been challenged as being too optimistic, particularly by a critic of Mr Baker’s scheme, a senior lecturer at the London School of Economics, Dr Nicholas Barr. He believes the Government is merely producing a more efficient drain down which to pour public money. Along with colleagues at the London School of Economics, Dr Barr believes an alternative system of collecting student contributions towards tertiary education through increased National Insurance contributions would be more efficient. His argument is backed up by the “Financial Times” newspaper, which has accused Mr Baker of pursuing the issue on ideological grounds rather than on the basis of either logic or economics. Mr Baker, meanwhile, appears determined to proceed with his plan to gather the repayments through a private-sector company owned by the banks. "Our financial institutions possess skills in information and banking systems which are not readily available in the public sector,” he told the House of Commons when he was tackled on alternatives last month. Mr Baker has already ' achieved massive changes in Britain’s education system during his five years as Education Secretary, including the imminent introduction of a national curriculum. The changes have been ushered-in with surprisingly little controversy. As a result Mr Baker is seen as being one of the most successful members of Mrs Thatcher’s second and third administrations. He is even tipped by some as a possible successor to Mrs Thatcher. Even though the final form of . the British student loan scheme has yet to emerge, commentators in London say there is no chance of it following the New Zealand scheme on to the scrap-heap. Although the chances of Mr Baker being promoted out of the education portfolio in a Cabinet reshuffle, expected late this month, are high, the loans scheme will survive his departure. His successor at the Department of Education and Science will have to oversee its implementation, watched carefully by one of the scheme’s most enthusiastic backers, Mrs Thatcher herself.