Education: Treating Students Fairly (Economic Affairs Committee Report)

Lord Forsyth of Drumlean Excerpts

Wednesday 16th January 2019 Lords Chamber

Moved by

[Lord Forsyth of Drumlean]

To move that this House takes note of the Report from the Economic Affairs Committee Treating Students Fairly: The Economics of Post-School Education (2nd Report, HL Paper 139).

[Lord Forsyth of Drumlean (Con)]

My Lords, it is a pleasure for me to introduce the report of the Economic Affairs Committee, Treating Students Fairly: The Economics of Post-school Education. The Committee set ourselves the following exam question: “Is the current structure of post-school education and training, and the way it is financed, appropriate for the modern British economy?” I fear that our short answer was, “Absolutely not”.

Before I explain our conclusions, I would like to thank our excellent specialist advisers for the inquiry, Professors Nick Barr and Andy Westwood, and the committee staff who produced the report, Ali Day, Ben McNamee and Ayeesha Waller. I have been told that I can speak for 20 minutes but everyone else can speak for only five. This is ridiculous and therefore I intend to keep my remarks rather shorter so that my colleagues can speak for longer, although of course I recognise that the five minutes is only advisory. My fellow members of the committee will take up some of the points I will not cover: my noble friend Lady Harding and the noble Lord, Lord Sharkey, will discuss our findings on part-time education, flexible learning, apprenticeships and maintenance support.

Tony Blair announced in 1999 that he wanted 50% of young people to go into higher education. That has been achieved, but it was achieved almost entirely from more students enrolling on to full-time undergraduate degree programmes—indeed, “higher education” is now synonymous with universities. Higher education is, however, much broader than the three or four-year undergraduate degree. There are thousands of technical and vocational qualifications which can be studied in a variety of higher education institutions and further education colleges, either full-time, part-time or as part of an apprenticeship.

The number of first-time undergraduate degrees awarded in the UK increased from 369,000 to 414,000 between 2010-11 and 2016-17. Over the same period, the number of other undergraduate qualifications at level 4 nearly halved—from 141,000 to 77,000. The number of vocational qualifications at level 4 was virtually unchanged at 130,000 to 134,000.

The crucial question to ask is: has this been in the best interests of students? Our evidence suggested that there is a shortage of workers with technical qualifications, but lots of graduates doing jobs in which their learning has no application. The evidence for this is set out in chapter 2 of our report, from which I will take two examples. The National Audit Office published a report on STEM skills last year, which found an acute shortage of people with vocational qualifications of levels 3 to 5, and an oversupply of people with STEM qualifications at degree level. Estimates of the proportion of graduates currently employed in non-graduate level jobs vary from 25% to 50%.

Some current graduates would undoubtedly have been better off with a technical or vocational qualification, relevant to the workplace, which would have helped them secure a more satisfying job and left them saddled with considerably less student debt. But if that is the case, why in the field of higher education has the undergraduate degree become almost the only game in town?

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.

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[Baroness Garden of Frognal (LD)]

My Lords, as those winding up, the noble Lord, Lord Watson, and I may be entitled to speak for up to 10 minutes but I shall attempt not to trespass for too long on your Lordships’ time. I add my thanks to the noble Lord, Lord Forsyth, and his committee for producing such a thought-provoking and authoritative report. Reading it, I felt nostalgic for the ill-fated Liberal Democrat policy of no fees in the 2010 election—perhaps I should not remind noble Lords—which we had fully costed. I mused on how this report would have read if we had followed that policy. I cannot help feeling that it would not have been any more depressing than the picture before us here. We would have saved a deal of money on the Student Loans Company, administration and tracking down non-payers, and of course we would have avoided the £1.2 trillion of debt that will face Governments in years to come. I am glad that my noble friends Lord Sharkey and Lady Bowles talked about fees and funding, so I will not go further on that. And we are where we are; it is no use hankering for what might have been.

The timing of the Government’s response has meant that it has kicked into touch many of the questions pending on the Augar review. I am sure we will all be watching with even more interest the findings of that review, which is due to report in early 2019. Perhaps the Minister can give us a timescale for the report. Universities UK considers the review to be an important opportunity to ensure that all post-18 routes are properly supported and accessible, particularly to those from disadvantaged backgrounds, and that our post-18 system is effective at meeting current and future skills needs.

We see from the report that skill shortages, as the noble Lord, Lord Baker, has set out, are particularly acute in the gas, electricity and water industries, construction and manufacturing. To that I think we could add hospitality, agriculture and indeed STEM teaching posts; we are woefully short of STEM teachers. Access to any higher or further education should be fair, accessible and progressive, should support national and local productivity and economic growth by providing a sufficient supply of higher-level skills, should be stable and sustainable, with the cost shared between taxpayers and graduates—I will come back to that later—should be funded to cover both living and tuition costs, and should be easy to understand and transparent. Those are all eminently sensible conditions.

The noble Lord, Lord Bilimoria, spoke about funding inconsistencies. We also heard about funding from the noble Baronesses, Lady Deech and Lady Harding. Like my noble friend Lady Smith, I paid no fees for my Oxford degree, although curiously we did have to pay if we wanted a certificate so I still do not have one of those.

[Lord Forsyth of Drumlean]

Very Scottish.

[Baroness Garden of Frognal]

The noble Lord can say that; obviously I could not possibly comment, not being Scottish.

There is so much in this report to applaud and support. The noble Lord, Lord Tugendhat, referred to the runaway train of universities. I shall turn to further education, of which we have already heard much. I note that the National Union of Students has declared that the FE sector has become starved of requisite funding, and it strongly supports the recommendation that the Government explore restoring teaching funding for further education colleges so that they can cover costs and stimulate demand for courses at Levels 4 and 5. I agree with the noble Lord, Lord Layard, in his remarks on FE. I was hosting an FE event at lunchtime with scores of staff and learners, including those from specialist colleges. It was a stark reminder of the breadth of provision that colleges serve and the dedication of the staff.

What about vocational skills—which we now have to call “technical”, although craft skills are vitally important too? They have nothing like the support and status that they deserve. I was taken with the quotation:

“There’s an oversupply of history graduates and an undersupply of geeks”.


Let’s hear it for the geeks of this world. I was also glad that the noble Baroness, Lady Jenkin, brought up social skills and volunteering and organisations such as City Year, which are such an important part of education.

We certainly share the concerns over part-time and adult education, which have been raised all around the House and which, as the report highlights, have seen a drastic and enormously damaging decline. I should declare an interest as having worked for City & Guilds for 20 years, and I am a vice-president of the institute. I have also recently had the honour of being awarded a fellowship by Birkbeck. Birkbeck is one of the great pioneers of part-time, adult degree-level education. Like the Open University, it has been transformative for so many people who may have missed going to university from school or who simply wished to continue learning.

Surely continuing to learn after school should be something that any Government should support and encourage, yet we have seen drastic reductions; the noble Baroness, Lady Harding, quoted a figure of 200,000 fewer part-time students in higher education in 2016 than in 2010. Both Birkbeck and the OU are facing difficulties and adult learners are facing a loss of opportunity. We have heard from my noble friend Lord Sharkey about the loss of continuing education departments in universities, and the noble Lord, Lord Burns, talked about the decline in part-time education. This surely has to be a bad thing for our country.

The noble Lord, Lord Willetts, who has been so influential in this area, spoke about all the areas that he knows well. My noble friend Lord Sharkey quoted his evidence, and I shall quote from it further. He said:

“The evidence is that the loans for part-time students have not worked. There has been low take-up and people have been put off. We need new mechanisms for helping adults to study part-time”.


We do indeed. There is plenty of evidence that adults are going to be risk-averse when taking out loans.

Part-time distance learning has flexibility at its core. It supports those in work to earn and learn, gives life-changing study choices to people of all ages and backgrounds and is a key driver of social mobility. The Government must recognise that part-time study in higher education is an essential part of the educational landscape and critical to adult reskilling. We know that there are not enough young people coming into the workforce to fill the alarming skills gap and as we lose EU workers, who feel increasingly unwelcome in the current climate, the shortages will become more acute and reskilling adults will become ever more essential. Yet what are the Government doing to encourage this? Precious little.

Fee loans should be made available to enable adults to achieve a second level 4, 5 or 6 when that second qualification is part of a career plan. There should be greater availability of fee and maintenance grants, as we heard from various sides, to ensure that those who have less resource are not prevented from accessing education. We cannot afford to exclude those who may have the skills and aptitude to learn, but not the funds. The noble Baroness, Lady Finlay, spoke vividly about the difficulties of those with few means, as did the noble Lord, Lord Kerslake, who spoke of the unfairness of the system.

We welcome the widening maintenance provision for 16 to 18 year-old learners, especially where their preferred provision does not exist in their locality. If T-levels are to be made available to adult learners, which was the original policy intention, then appropriate maintenance provision should be available to support them on the programme. I have to say we have some real concerns about T-levels, particularly in rural areas where access to the compulsory work experience may not be available.

We have long advocated a return to the individual learning account, which would create a learner-led, post-18 funding system. Both these and the subsequent individual training accounts have been withdrawn, yet there is great merit in a system which incorporates commitment from learner, government and employer to ensure that people can progress. Maladministration meant that ILAs went wrong when introduced, but the system is sound and should be further explored. Do the Government have any intention of looking again at ILAs? They should create a learner-led, post-18 funding system that invests in all adults equally and puts learners and future learners in the driving seat through an equal lifetime entitlement.

The noble Lords, Lord Kerr and Lord Forsyth, and the noble Earl, Lord Dundee, all talked about apprenticeships. These should be viewed by young people as just as valid an option as the academic route of sixth form and university. For this to happen, we need a change to school ratings, where the pressure on GCSEs and A-levels is intense. As long as schools are measured—and, indeed, funded—on academic criteria alone, they will inevitably strive to achieve in those areas, to the detriment of work-based achievement. A recent IPPR report shows evidence that the amendment introduced by the noble Lord, Lord Baker, to the Technical and Further Education Act 2017 is not being respected by schools; fewer than two-fifths find time to allow colleges, UTCs or alternative providers to explain to teenagers the varied options which might suit their skills and interests better than university.

Schools Ministers must take long, hard looks at the incentives which encourage schools to meet not the needs of students but the needs of largely university-educated Ministers and officials, who have little understanding or respect for academic alternatives. I urged those with FE backgrounds to go into politics and the Civil Service so that we can attempt to redress that balance. In coalition Government, I tried to persuade Michael Gove that schools should be encouraged to celebrate their apprenticeship leavers as much as their university entrants, but he could not be persuaded. In his ministerial team, I was also struck that I was the only person around the table who had ever been a teacher and who had any first-hand experience of vocational and further educational colleges. We need a change in government and we need the Government to end the anomalies in funding between FE and HE.

If this report can address the generations-old inequality of standing between academic and vocational education, it would be of immense advantage to individuals, the workforce and the country. In these uncertain Brexit days, we cannot afford to ignore measures to generate skills and knowledge that are vital for the UK.

I once again thank the noble Lord, Lord Forsyth, and the committee for such a valuable report and I look forward to the Minister’s reply, although I am sadly conscious that his remarks are likely to refer us to the review.

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[Lord Forsyth of Drumlean]

My Lords, shortly after the committee had concluded its report, the Prime Minister asked me to go to No. 10 to discuss it. In the waiting room the words that she spoke on the steps of No. 10 after she was elected, about a country that works for everyone, are framed on the wall. I said to her that this report goes absolutely with what she wanted to achieve, and she said that that was indeed the case. What an opportunity for any Secretary of State for Education who takes the trouble to read this debate: there is all this unanimity across the Chamber on what needs to be done, and the report sets it out. I am most grateful to my noble friend Lord Younger for his very courteous and constructive response.

I understand about the Augar review and the inability to respond, but Members will be aware that the Augar review is simply advisory. The decisions will be taken by the Department for Education, and any Secretary of State for Education has a huge opportunity—I very much look forward to seeing the response to the Augar review—in wasting not a minute more in making the changes necessary. For every month and year that goes by, another cohort loses out on opportunities to which we all agree it is entitled.

I thank everyone who has spoken in the debate—time has gone on so I shall not refer to anyone—and made a contribution. I thank my committee, and my noble friend Lady Harding for pointing out that I do not tell the committee what to do. It is a joy to chair this committee; it is always a joy to be surrounded by people who are better informed and brighter than you. This report was unanimous on a controversial area. The way forward is clear: I hope the Government will see the signposts and take that way.

Motion agreed.