Loan baby is hot to handle

Student hardship was a big issue on doorsteps at the last election. Do ministers now wish they had abandoned it there? Mike Baker reports

"It'll all be over by Christmas." That was the word among insiders after the Prime Minister announced a snap review of student financial support at the Labour party conference last October.

Like World War One generals, government advisers seriously under-estimated the difficulties of the task ahead.

Within weeks the review was bogged down in a quagmire of arguments between the Downing Street policy unit, the Treasury and the Department for Education and Skills. There is no doubt that, as the weeks turned to months, many insiders regretted the Prime Minister's decision to reopen this can of worms. It did not help that other ministers appeared to have been taken by surprise by the announcement.

The origins of the review lay in a bout of post-election navel-gazing. Labour's psephologists reported that student hardship had been one of the voters' main doorstep grumbles. Downing Street decided to act. Yet others felt that the worst of the storm had been weathered and, despite the moans, there had been no evidence of a decline in university admissions.

So what are the options? In the initial phase, insiders were pushing two models, both involving some form of graduate tax, although the spin-doctors preferred the less threatening label "graduate contribution".

The first model involved every student, irrespective of their own or their parental income, receiving a maintenance grant. This apparently generous return of full grants would be funded by a graduate tax. Graduates would not be paying off their own grants but making an extra contribution to the overall costs of student support.

This option had two advantages: restoring grants would be politically popular and, removing a financial obstacle in the way of poorer students, would make it easier for the Government to hit its target of getting 50 per cent of young people through university. But there were two major disadvantages. First, focus group work revealed deep hostility to a graduate tax from middle-class voters. Second, the initial cost of grants would be a burden on the Treasury until the graduate tax started to kick in. The option fell from favour.

The second model was less radical. Grants would be brought back but would be means-tested so only those in greatest need would get help. However, all graduates, whether or not they received a grant, would still have to pay a graduate tax, although the amount would be less than required under the first model. Once again, though, the disadvantages became clear: the middle-classes would be particularly annoyed if they were asked to foot the bill without getting any of the benefits. This option also faded into the background. Another radical idea in the early stages of the review was the abolition of tuition fees. This would mean a political U-turn as Labour introduced the fees in the first place.

Although ministers have always been quick to point out that around half of all students are exempt from paying fees, they realise that many potential students from low-income families are deterred by concerns over the cost and fear of debt.

So the initial options were radical. But as time passed ministerial feet grew colder. By the New Year the review was still hanging about like the turkey carcass. Ministers had nothing ready to announce. Eight months on from its hasty conception, the review is now expected to be produced later this summer.

As one Whitehall insider put it: "If it's bad news we will put it out at the same time as the Chancellor's announcement." In short, to use a dishonoured phrase, they will bury it. The strong expectation is that the Government will leave the current system of fees and loans largely intact but will find more money to provide extra loans or grants targeted at the poorest students.

This would amount to little more than an extension of the relatively new opportunity bursaries for students from schools with little tradition of sending pupils into higher education. But this approach would appeal to the notoriously "prudent" Gordon Brown who prefers to target extra money at those with greatest need.

If, as has been hinted, education is a winner in the comprehensive spending review then the taxpayer might foot some of this bill.

However, schools will demand the lion's share of any windfall so it is likely that either students or graduates will have to pay more too.

An easy way to raise more money would be to increase fees for those who can afford to pay. The Government had ruled out allowing popular universities to charge top-up fees but more recently ministers have dropped hints that they could happen. Another possibility would be charging differential fees, with a scale of charges related to the actual cost of the course or student's earnings potential. So, for example, lawyers and dentistry students might pay pound;3,000 a year while philosophers would still pay just one pound;1,000.

It is more likely, though, that ministers will focus on loan repayments. At present, students repay their official loans at the rate of 9 per cent of income once they are earning more than pound;10,000. The rate of interest only covers inflation. This means, in effect, that better-off students are receiving a subsidy in the form of a cheap loan. Ministerial advisers have even been heard to grumble that some use the money to pay for skiing holidays.

So one strong possibility is that a real rate of interest, above inflation but below commercial loan rates, will be applied to student loan repayments. However, this could hit poorer students hardest as it would take them longer to repay, allowing the interest to mount up.

After the fanfare of the review announcement, and the long gestation period, real interest rates on loans and more hardship loans or grants will be rather a disappointment. This review came in like a lion but looks set to go out like a lamb. I wonder of Tony Blair will be a responsible father and be there at the birth as well as the conception?

SOURCES OF SUPPORT

Student Loans: up to pound;3,905 pa (outside London) for living costs. 25 per cent contingent on parental income. Repayments: 9 per cent of income once earnings rise over pound;10,000.

Tuition fee waiver: the pound;1,100 pa fee is waived if parental income is under pound;20,480 and reduced if below pound;30,501. About 50 per cent will pay no fees.

Opportunity bursary: worth pound;2,000 over three years for students in education action zones or Excellence in Cities areas.

Supplementary grants: for students with disabilities, lone parents, additional travel costs etc.

Hardship fund loans: extra help for students with specific financial needs.

THEN AND NOW

1980

* 475,000 full-time and 175,000 part-time students

* one in eight goes to university, mostly school-leavers

* free tuition

* means-tested grants to cover living costs 2002

* One million full-time and 375,000 part-time students

* one in three goes to university via wider range of routes

* means-tested tuition fee of up to pound;1,100

* grants replaced by loans

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