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Sale of Student Loans Bill

My Lords, first, I welcome the Minister to her new role. She has to date answered a number of questions in the House, but this is the first time that she has had a substantive Bill to introduce. I thank her for her comprehensive and careful introduction to the Bill. We on these Benches would not start from here. There would be no loan book to sell if the Liberal Democrats had been in control because, on the whole, we opposed the idea of top-up fees and the loans necessary for them, although we supported—and continue to support—loans towards maintenance at universities and welcomed the introduction of grants from those from lower-income homes. Something that worries us, even today, is the size of loans that young people must undertake. Under the old system, maintenance loans amounted to students leaving university with debts in the region of £12,000. When you add to that the £9,000 top-up fees, it means that students are now leaving college with debts of £21,000, repaid on an income-contingent basis. The income threshold is £15,000 and the average graduate salary is currently £21,000, so most of those leaving college will start repaying their loans more or less immediately. On top of this 9 per cent of their earnings repaying their loans, they will also pay income tax at 22 per cent and national insurance at 10 per cent. The effective marginal rate of repayment and tax on our young graduates is therefore 41 per cent: higher than any millionaire pays. That is rather tough on young graduates who are entering a world where prices are rising quite fast and where the cost of living in property terms has risen astonishingly high. It is extremely difficult for these young people. It is not just a matter of repaying over the first two or three years, but over 15 years. Unless they move rapidly to earning £50,000 a year, they will be repaying out of earnings of £20,000, £25,000 or £30,000 at a rate of 41 per cent of income: out of every £100 of income, they will have only £60. It is a very tough world for these young people. This whole repayment business is tough. We also need to reflect a little on the degree to which we are encouraging people to take on credit, the problems which we have run into with Northern Rock and all the problems of people who have taken on loans that they cannot afford to repay. An interesting study was undertaken by the Rainer foundation looking at the way in which young people treat debt. It found that people today—perhaps this is a good thing—do not worry about getting into debt. If they want something, they go out and spend on their credit cards and repay later. However, we can worry a little about the degree to which in this current consumerist society we are encouraging young people to spend now and pay later. Encouraging students to get into debt reinforces the idea of not worrying about getting into debt. However, we have moved down that track. The Minister began by celebrating the fact that we have more students in higher education than ever before. She is right, and we, too, celebrate the fact that lots of students are coming into higher education. However, she should be a little careful about trumpeting the success of the top-up fee regime before we know what impact it will have. Only last week, we had a report from the Sutton Trust showing that, as regards the relative proportions of students from different income groups, there is a smaller proportion of students from lower socio-economic groups and there is real worry about taking on debt among some of those groups. Particularly if we are going to take the cap off top-up fees, have much higher fees and therefore much higher loans, we must think about that. So, while I join the Minister in celebrating, we have to be a little careful. We are now confronted by a situation in which the Government have decided that we are going down the route of loans. They are lending students considerable sums of money, which are going directly into the universities. The sums that have already been leant by the Treasury have gone into the universities: the fees have been paid for the students, and the students have incurred debts. The Treasury is now confronted by the repayments, which will be collected through the PAYE system by Her Majesty’s Revenue and Customs, and will be an income stream for the Treasury over the years. The Bill suggests that that future income stream for the Treasury should be sold off now to translate it into present day assets to be used to pay off the national debt. As I understand it, the current situation is that the payments on the loans are not revenue but are treated under the resource accounting mechanism as capital. Therefore, at the moment, the increased loans are currently sitting in the national debt. As I said, we have a backlog of £18 billion which is growing by more than £4 billion a year. What was £18 billion in 2004 is £21 billion now, will be 25 billion next year, and so forth. It will be a considerable amount of government debt. The great advantage of selling it all off is that it transfers it from sitting in the national debt into money that the Government can put to paying off the national debt. One feels that there are two advantages to the Government. They have made a great deal about transferring the risk, which I will come back to in a moment, but on the other hand, they have kept rather quiet about the advantage to them of paying off bits of the national debt and the fact that they have already broken their golden rule by their current handling of the economy. This helps to balance the books a little better over the course of the Comprehensive Spending Review period 2008-11. The hope is that they will sell off enough loans to pay off in the region of £6.2 billion of that debt. To raise £6.2 billion, they will probably have to sell off in the region of £8 billion to £9 billion of debt. In principle, the notion of translating debt into assets is not one that we object to from these Benches. The Government intend to create this special purpose vehicle, which will securitise that debt. As I understand it, they will transfer a tranche of loans to that special purpose vehicle and the vehicle will act as some specialist corporate bond issuers act: it will issue bonds reflecting different elements of risk. Some will be very low-risk bonds, some will be high-risk bonds and the interest attached to the different bonds will reflect the amount of risk underlying them. If the Government are successful in making that transfer to the special purpose vehicle, they will carry on doing that. As the Minister said, this is an enabling Bill. They will not stop at selling off £6 billion; in subsequent CSR periods, more money will be transferred by that mechanism. There is for the Government a continuing potential stream of income from selling off those loans to pay off part of the national debt. A number of issues arise from that process. They have been discussed at some length in the other place where, to some extent, answers have been given, but we in this House would like to look at them ourselves as the Bill proceeds. The first issue is the conditions for repayment. The Government promise that the conditions for borrowers will not change, that they will be totally unaffected, but that is not written into the Bill; it is written into regulations and regulations can change. We have some worries that borrowers could be confronted by considerably changed repayment requirements because the regulations have changed. Arguably, it would be more satisfactory if that were written into the Bill, rather than just in regulation. The second issue is that of value for money. The Minister said that only if the sales represent good value for money will they go through. How can we judge value for money here? Ministers have been asked to give an estimate of how much discount will have to be given to sell off the loans. We want to sell off £6 billion-worth of loans and there is a loan book of £18 billion. In order to sell off the loans, some sort of discount will have to be given to encourage other people to take them up. Ministers are very coy about this because they do not wish to give away to the market what they think the market might pay, but how can Parliament judge whether the loans are value for money if it does not know what rate of discount is to be given? One is caught in a conundrum. The only way in which we can judge value for money is after the event. Arguably, this is how Parliament acts on these sorts of things. The National Audit Office will undoubtedly audit the sale, and the Public Accounts Committee in the other place will look at it and judge whether we have good value for money, but we know that on occasions the Government have not succeeded in achieving good value for money in their sales. I hear what the Minister says—that we will know whether the sale is good value for money only if it goes ahead—but we cannot judge that because we simply do not know the terms on which the loans will be sold. A third issue poses some problems. How risky is the sale? Mr Rammell, the Higher Education Minister in the other place, repeatedly made the point that the loans are rather low risk—the risk of default is not very high—because they are being collected through the PAYE system by Her Majesty’s Revenue and Customs. However, there is the knotty problem of what happens to the loans that are going to European students, because every European student has the right to the same loans as every English student. The problem is arising now because the loans have increased markedly in the past few years, but how far Her Majesty’s Revenue and Customs—perhaps I should say the Student Loans Company, because it will have to chase these people if they default—will actually be able to chase up European students is something of a moot point. However, that is a different issue. As I understand it, the Government are going to sell off tranches of the student loan book. It was implied in the discussions in the other place that, when they sell off these tranches, the tranche of loans to good repayers will be sold off first. It was certainly implied in the discussions in Committee and on Report that these tranches would be sold off according to risk. You can see that there is probably not much difficulty in selling off the good risks, but does this mean that the bad risks will not be sold off? If the bad risks are not going to be sold off, is there any transfer of risk at all? Does not the public sector retain the risk? If it is not possible to sell off the high-risk loans, the public sector will retain them, so what is the transfer of risk? Is there really a transfer of risk? We must look at this in some detail and try to discover precisely how the sales are to be made, whether there is to be a sale of all risks, whether it is up to that special purpose vehicle to distinguish between the high risks and the low risks, or whether the special purpose vehicle will take only the better risks. As I say, the public sector will be left bearing the risk. Then there is the transfer of data. Because loans are being transferred, data about who is paying back the loans, although anonymised, must also be transferred. We are told very firmly that the transfer of data will be secure and encrypted, but we know that the people who are collecting all these data are Her Majesty’s Revenue and Customs. What happened in November? Her Majesty’s Revenue and Customs sent by ordinary mail two unencrypted CDs containing the details of 25 million families receiving child benefit, and the disks were lost. So far as we know, they have still not been found. Can we trust Her Majesty’s Revenue and Customs to make sure that this data is secure? In this age of stolen identities, will personal information, including information about bank accounts and national insurance numbers, be safe? Will it be transferred or encrypted? Can we trust it? The security of data needs to be looked at. Lastly, on the selling-on of loans, we are told that only in exceptional circumstances is it expected that this special purpose vehicle will be sold on. Nevertheless, it can be sold on. It was suggested in the other place that one of the purchasers of the special purpose vehicle might have been Northern Rock. Who would have ended up meeting the bill? Once again, it might have been the public sector. Is there any control over who might buy it? What about overseas companies? Do the regulations restricting the terms on which these loans and so forth can be made apply to offshore companies based in Monaco or somewhere like that? In Committee, we will need to look at a lot of detailed questions. While I look forward to spending some time with the Minister exploring the issues that have been raised, broadly speaking we go along with what the Government propose, but we have those reservations about it.