2. STUDENT LOANS AND GRANTS
Funding the System
The student loans system is extremely complex. This initial section attempts to clarify the system as much as it can by setting out the main aspects of how it currently works. The key issue is that despite student support policy being fully devolved, certain parts of the system are still controlled by HM Treasury and are therefore outside our control (more details on loan funding are set out in Annex A).
How are loans funded?
Loan advances are funded directly by HM Treasury and not through the Scottish Government's devolved budget. Funding for loans is provided to the Student Loans Company ( SLC) who make payments to students. In Scotland, the Student Awards Agency for Scotland ( SAAS) assess applications for support and pay bursaries. They then pass details of loan awards to the SLC.
There are some costs associated with loans which are met from the Scottish Government budget each year. These costs represent the fact that Government has to subsidise the low rate of interest on the loans and account for lost income from loans that will eventually be written off and will not be repaid in full.
Accounting rules mean that this write off and interest subsidy must be accounted for in the year the loan is paid. To achieve this, each year HM Treasury provides funds for the loans paid out and the Scottish Government meets the costs associated with that - which amount to 31% of loans provided.
The Scottish Government also meets the fixed costs associated with the loans system, such as the Scottish contribution to the running costs of the SLC.
Effect on the Scottish Government and HM Treasury
In the current spending review period, budgets across the Scottish Government and HM Treasury are higher for loans than they would be if we were only paying grants. This is because HM Treasury currently provide funding for loans and the Scottish Government has to make provision for the associated costs of loans. Paying grants directly to students would not require these additional costs. However, as HM Treasury currently pay loans, grants would place greater pressures on the Scottish Government's devolved budgets.
HM Treasury off-sets repayments against loan payments each year, so that as repayments increase each year, the amount that is required to be paid out in loans by HM Treasury decreases. In the longer-term, repayments should increase to a level where they match, or exceed, what is being paid out annually. At the moment, loan repayments are only around one third of the value of the total loans paid out in any one year and it will be at least a decade, maybe even longer, until we reach the point where repayments match annual payments.
Difficulties with the loans system
As a result of the complexities of the loans system and the role of HM Treasury in providing funding for loan advances, the Scottish Government does not have full control over the whole student support budget. If we did have such control then we would have far greater flexibility over the funding available, making it easier for us to move to a full grants system more quickly.
To illustrate, the budget set out in Annex A shows that the net new lending in loans from HM Treasury is budgeted at £124.3 million. This also takes account of loan repayments expected. If this amount was transferred to the Scottish Government's devolved budget and added to the savings which we would make from our budget for the cost of student loans (£71.4 million). With the additional £30 million available in 2010-11 this would give us £225.7 million, which would take us far closer to funding a full grants system in Scotland.
If other policy decisions were taken to remove some existing areas of support (see section 4) this could free up some of these resources which would then allow us to consider options to fund the servicing of the existing debt.
The reality though is that we have to work within the framework we have inherited, as part of the devolution settlement and within the financial and political restrictions placed upon us, to deliver the best deal possible for students.
Moving to Grants
This Government believes that student loans are wrong for Scotland. We feel that the loans system is overly complex and that it would be simpler and more effective for public funds to go straight into the hands of students. This would be better for students and graduates and it would be simpler for the Scottish Government to deliver.
Looking at the budget for HE student support in 2008-09 ( Annex A), around £180 million was budgeted for loan advancess and £71 million was provided to cover the cost of paying these loans. In addition to this, provision was also required for the fixed costs associated with loans such as the running costs for the Student Loans Company and other provisions associated with the loan debt currently held by Scottish Government and the banks 6. This amounted to another £21 million. So in this one year over £92 million was budgeted by the Scottish Government or the variable and fixed costs associate with student loans.
Whether loans are ultimately cheaper than grants depends on a number of factors, in particular the level of repayments to existing loans and the continuing costs of operating the student loans system. At the moment, across all Government the budget allocation for loans is higher on an annual basis than it would be if we were providing grants. This will remain the case for some years and while there may come a time in the future that loans do support themselves, that still seems some way off. What is clear though is that grants would provide a simpler system for students and allow them to engage in education without the fear of debt hanging over them.
We believe that it is wrong for students to be put into debt by the state. Graduates are at a point of their lives where they are facing life-changing decisions about their careers and their futures. Leaving university with debts of £10,000 7 or more can put real restraints on what they are able to do when they graduate.
For those from low income backgrounds, debt and the fear of debt can create a barrier to participation in higher education. It can also severely hamper opportunities for those who wish to attend higher education in terms of where they study and what courses they choose. By reducing the prospect of debt we can open up the possibility of higher education as a realistic and affordable option for those who currently see the financial considerations as an insurmountable barrier.
Alternative Approaches
We believe the best option for students would be to remove loans and replace them with grants. Having engaged widely with students and other representatives, we are aware that there are a number of other views on how we could best change the student support system. As well as worrying about debt, students have real concerns about the amount of money that they have to live on while they are studying. These concerns were also expressed in Parliament during the progress of the Graduate Endowment (Abolition) Bill 2008 and as a result, this paper will consider options for increasing the overall amount of funding available to students in the shorter term. The paper will also seek views on a proposal from the Association of Scotland's Colleges to introduce full bursary support to students on higher education level courses in colleges.
Devolution and Servicing Debt
The financial and political restrictions we face have resulted in a decision not to allocate any money to servicing debt in the current spending review period. This was confirmed by the Cabinet Secretary for Finance and Sustainable Growth on 14 November 2007 during his statement to Parliament on the Strategic Spending Review. With full control of all the budgets associated with student loans and Parliamentary support for enabling legislation, it would be possible to consider a wider range of options to service debt.
Unfortunately though, these restrictions placed on us mean that we cannot progress this proposal within this Spending Review period. Our priority is now to channel the available funding into the proposed move to grants. However, we do still want to seek views on the principles of the methods we wish to explore to service debt should funds be made available in future. This is addressed in section 6 of this paper.