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Sale of Student Loans Bill

Volume 699: debated on Tuesday 19 February 2008

My Lords, I beg to move that this Bill be now read a second time. Participation in higher education in this country is at its highest level ever. This has been brought about through the hard work of all involved in the sector, increased public investment and the systematic breaking down of financial barriers to higher education. Alongside reintroduced non-repayable government grants and non-repayable bursaries from higher education institutions, we have developed a system of student loans that means that no one need be deterred on financial grounds from fulfilling their potential through higher education.

Income-contingent repayment loans are now available for maintenance and tuition fees. No home full-time undergraduate studying for their first degree has to pay tuition fees as they study. Repayments are made after the borrower has left higher education and are directly linked to the individual’s earnings, with collection through payroll deduction alongside tax and national insurance. Repayments are related to the size of the pay packet, not the size of the loan. This makes them quite different from the old mortgage-style student loans that were sold in 1998 and 1999 for a total of £2 billion. The loans are not commercial loans. The low interest rate, linked to inflation, means that graduates pay back no more in real terms than they borrowed.

We are rightly proud of our record of breaking down the financial barriers to education and widening participation. We are confident that participation in higher education will continue to grow and that the number and proportion of students from lower socio-economic groups will continue to rise. We have sought to support that further, with additional changes to the student finance system announced last year. But growth in participation brings an interesting challenge; as student numbers have grown, so too has the Government’s student loan book. The English income-contingent loan book was valued at £17 billion at the end of financial year 2006-07, and it is set to exceed £50 billion within 10 years. This projected growth makes it all the more important to consider carefully how best to manage this large public asset. That is what this Bill addresses.

In the 2007 Budget, the Government announced their intention to begin a programme of sales of income-contingent repayment student loans. We believe that ownership of the loans would be best placed in the private sector. Transferring ownership of large parts of the loan book will reduce the risk of holding loans on the Government’s balance sheet. The Government anticipate receipts from the proposed sales during the Comprehensive Spending Review period of £6.3 billion. This is a forecast, not a commitment. We are committed to the student loans sale programme, but only if any sale represents good value for money and the market conditions are right.

We have two guiding policy principles in developing this sales programme. First, there should be no adverse impact on borrowers. Terms and conditions for all loans will, as now, be governed by regulations scrutinised by Parliament. The borrowers’ experience will not alter and the collection and administration systems will be the same whether or not one’s loan has been sold. This Bill contains the provisions that we need to ensure that this enduring protection for borrowers is secured. Secondly, any transaction must yield good value for money. Ministers and departmental accounting officers alike must ensure good value for money in all that they do. This responsibility is at the forefront of our minds as we prepare the sales programme.

Retaining the loans in the public accounts exposes the Government to the risks surrounding the repayment of very large amounts of money—tens of billions of pounds. The Government have made forecasts of how quickly the income-contingent repayments will be made. But by the very nature of a system that is fully sensitive to changes in each individual’s earnings over time, we cannot be certain how quickly that money will come back to the taxpayer. It is not usual for government business to remain exposed to large amounts of debt-related risk and we believe that the private sector can take on and manage those risks. Having commissioned expert advice from the financial sector, we believe that there will be an appetite in the market for assets backed by the loan repayments.

All transactions in which loans are sold will be subject to a rigorous assessment that we are achieving good value for money. The assessment will ensure that the sale is competitive and takes place under the right market conditions, that potential bidders have enough information to make informed bids, and that there is a genuine transfer of risk from the Government to the purchasers. There will be a comparison made of the proceeds to be achieved from selling the loans against the value of retaining them on the Government’s books, taking account of the risks involved.

We should be clear that the assessment will be a matter of judgment for the Government of the day for each proposed transaction. My honourable friend the Minister for Lifelong Learning, Further and Higher Education has already made a commitment in the other place that the Government will report to Parliament after each sale. The National Audit Office will scrutinise the sales and has already signalled that it may report to the Public Accounts Committee on this sales programme.

We must bear in mind that this Bill is designed to enable a long-term programme. We expect student loan sales to become a regular feature of the student finance system. The precise way in which sales might be carried out may vary over time. Our current approach to proposed sales is different from the approach to sales made 10 years ago due to the way in which markets operate having evolved. In the same way, a Government in 10 or 20 years might well want to design sales in a different way again to secure good value for money in the markets of that time.

Therefore, the Bill needs to support sales arrangements more broadly than the particular way that we are planning to conduct the initial sales. It may, however, be useful to noble Lords if I explain our current approach to the sales transaction. In making a sale, the Government would not expect any financial institution to want to own the loans on its balance sheet. Therefore, our current plans are that the loans will be securitised. This is a process by which a special purpose company, or SPV, is created to issue bonds, which purchasers can trade in the financial markets. Those bonds are backed by income received from the student loan repayments of the portfolio, not by repayment of particular individual loans. A much wider range of investors will be more interested in purchasing tradable bonds than in buying a package of loans outright, because they will know that they can sell these bonds in the markets if they want to.

Structuring the loan portfolio into different bonds will attract a wide range of investors and maximise its value. Different investors will be interested in different types of bonds with different risks and return profiles. Pension funds and banks, for example, may want the relatively secure investment of AAA bonds, whereas other investors, such as fund managers, may prefer the relatively greater risks but higher returns of less secure bonds. As a result, the Government believe that there will be a keen appetite for these assets in the private sector at a price that will yield good value for money. Following a procurement competition, we recently appointed the sales arranger to prepare for the potential sales in 2008-09 for the Government on this basis and to arrange sales following the Bill’s Royal Assent.

Once the loans are sold and securitised, we expect them to be sold on very rarely, if ever, because owning the loans is the central purpose of the special purpose vehicle. The Government will decide on the portfolio of loans to be sold in any given transaction. We need to be sure—this is particularly important—that the loans that we offer for sale are of a type where there is sufficient information for the market to be able to price them properly, otherwise there will be no prospect of obtaining good value for money. This might mean, for example, selecting for sale loans of a certain maturity so that borrowers will have been out of university for a sufficient period to be generally connected with the repayment system through HM Revenue and Customs. We will not be selecting on the basis of the characteristics of individual loans, such as salary levels or what subjects have been studied, and loan purchasers will have no say in which loans are available for them to buy.

I give existing and future borrowers this reassurance. Purchasers of loans will not be able to charge a different rate of interest, change the income threshold for repayments or use a borrower’s personal details for any purpose other than managing the loan. Purchasers of bonds backed by the loans will have no direct relationship with borrowers, the Student Loans Company or the Government. Their interest will be solely in the income which the bonds can provide.

I now turn briefly to the individual clauses of the Bill. It is not a long Bill so I shall take the time to do so. Clause 1 allows the Government to sell the loans, while retaining the power to require that purchasers administer the loans in a way that meets our requirements. Clause 2 concerns various provisions that can be included in sales contracts. Clause 3 enables onward sales and deals with provisions relating to such transactions.

Clause 4 enables regulations to refer to purchasers and to continue to govern loans when they are sold. Clauses 5 and 6 enable the flows of money and information needed for the current repayment system to operate for sold loans as well as retained loans. Clause 7 is a declaratory statement explicitly confirming an existing understanding that all income-contingent student loans are exempt from the terms of the Consumer Credit Act 1974 because their characteristics differ substantially from commercial loans. Clause 8 provides powers for the Welsh Ministers, in respect of Wales, which are equivalent to those which the Bill proposes for the Secretary of State in relation to England.

The last time this House considered student loans it was a matter of some controversy. By contrast, I believe that this short and mainly technical enabling Bill is quite different. Its provisions have no relation to future decisions on broader student finance policy and have no impact on how students obtain financial support for their time in higher education. Rather, it enables the Government to manage efficiently a large and growing public asset. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Baroness Morgan of Drefelin.)

My Lords, I appreciate very much what the Minister has said, particularly on the last clause, referring to Wales. The Sale of Student Loans Bill will give the Welsh Assembly the power to sell off the Welsh portion of the student loan book valued at £1.1 billion, which is a small part of the £18.1 billion for the whole scheme. However, any money arising from the sales will go to the Treasury’s Consolidated Fund.

At the moment in Wales, we have the most severe school closure programme that Wales has ever known. Certain local authorities are having to close up to 30 schools. They cannot continue because the pupil numbers are so small. We would not argue that every school should be kept open, but if this £1.1 billion came to the coffers of the Welsh Assembly it could make a massive difference. The school in which David Lloyd George was educated has, at the moment, 80 pupils, yet it is threatened in a clandestine way with closure. If this money could be injected into Welsh education rather than go to the centralised Westminster Consolidated Fund, it would make a massive difference.

In Committee in the other place, Bill Rammell, the Minister responsible for the Bill, admitted that there was no way that any money raised from the sale of Welsh student loans could be earmarked for Wales. If we want the money in Wales, the Welsh Assembly will have to go cap in hand to the Westminster Government to ask whether it can have its own money. If the Bill provides an opportunity for the Assembly Government to raise money, it makes sense for it to spend the money in the way that it wishes. The fact that Wales would not necessarily see a penny of any revenue raised will provide a strong incentive for Welsh Ministers to do nothing, even if they think that selling off the loan book would provide better value. The Welsh Assembly Government may very well choose not to use its new powers, but I do not understand why, if it does, the money has to stay in London. Speaking as a Welshman to a Minister who is also from Wales, I suggest that devolution means trusting the Assembly to deliver policies that will make a difference to Wales. Once again, unfortunately, the Westminster Government are clutching tightly at the purse strings. I urge the Government to think again on this matter.

My Lords, I want to speak briefly on the Sale of Student Loans Bill. I am delighted that it gives me an opportunity to welcome the Minister to her new position as Parliamentary Under-Secretary at the Department for Innovation, Universities and Skills. I also pay tribute to her predecessor, the noble Lord, Lord Triesman, who even in his relatively short time in the department was committed to ensuring that the issue of the student experience played a prominent part in the political agenda. I have every confidence that it will continue under the stewardship of the noble Baroness.

This relatively uncontroversial Bill seeks to raise £6 billion for the government coffers from selling parts of the student loan portfolio. It has been done twice before, as my noble friend said, in 1998 and 1999, when loans worth more than £2 billion were sold. I am very much in favour of the Government’s rationale in wishing to transfer this risk to the private sector and, ultimately, reduce this part of the public debt. However, it would be helpful, with the current state of the financial markets, if the Minister could reassure the House whether this is the most appropriate time to make the sale. I was reassured by many of the conditions that the Minister described— the terms under which a sale might be contemplated. However, it would be helpful if she could say whether she has received advice from the financial services sector on the best time to obtain the optimum price.

There is concern, particularly among student groups, that individual student debt is growing. They worry that this is having a negative impact on access to higher education. It is worth reminding the House that the current student support package is one of the best that there has ever been, with a generous bursary package and student loan repayments not starting until a graduate is earning £15,000. While there is of course no room for complacency on access, it is particularly pleasing to see that university applications between 2002 and 2007 have increased by 5.5 per cent from the lowest socio-economic groups. The UCAS application figures for this year, released last Thursday, show an overall 6.7 per cent rise in student applications over the 2007 figures.

I declare an interest as chief executive of Universities UK. I should like to highlight a report that UUK commissioned from PricewaterhouseCoopers in 2007 on the graduate earnings premium. It illustrated the fact that, over a working life, a graduate is predicted to earn some £160,000 more than someone with two A-levels. It is clearly a sound investment. There is benefit both to the individual and to society at large.

The sale of the loan book leads me to ask a wider question about the financial state of the higher education sector, if the Minister and your Lordships will indulge me for just a further moment. As I said in the House on 8 November 2007, during the debate on the Loyal Address, universities were grateful for the Government’s commitment to the maintenance of the unit of public funding for teaching in the recent spending review. I also welcomed the additional funding for the Higher Education Innovation Fund. However, the financial climate in the higher education sector is increasingly volatile and an investment backlog still exists. The sector needs stability to plan for the future. With that in mind, I ask the Minister whether any further thought has been given to my proposal in the Loyal Address that at least some proportion of the money raised by the sale of student loans would be reinvested in higher education.

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 for 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 lent 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.

My Lords, I join in welcoming the Minister to her first Bill in her new role and I look forward to working with her. We on these Benches welcome the principle behind the Bill. I am sure that the Minister is aware that at the previous two general elections the Conservative Party advocated similar proposals. The Bill is in line with Conservative intentions to move the student loan book to the private sector. However, I say that not without qualifications. Many of the questions that I shall ask the Minister have already been asked, but it is wise still to ask them so that she understands the importance we put on them. This transfer from the public sector to the private sector cannot be made unless proper safeguards are in place to protect the public interest and, of course, the interests of students.

I have listened carefully to what the Minister said and to her assurances. However, I should like to concentrate on asking questions about safeguards. I hope that she will offer some strong reassurances to satisfy those somewhat persistent niggles that seem to arise from the Bill. Will she clarify the nature of the sale? Will all borrowers, present and future, be assured that the transfer will not permit information being passed on to any other organisation? Will it be part of the contract or will it be covered by some other parliamentary mechanism, such as guidance or statutory instrument?

In March 2006, the Government published the student income and expenditure survey for 2004-05. The survey found that English domiciled full-time students graduating in the academic year 2004-05 had an average total debt of £7,918. For those students commencing courses after the introduction of variable fees in the years 2006-07, the debt was set to rise to around £15.000. However, the figures from a survey undertaken by NatWest Bank found that graduates leaving university in 2006 had on average debts of £13,252, a 5 per cent increase from 2005. We will not know the full impact of variable fees until a review has been carried out. Surely it would be sensible to call for that review now rather than wait until 2009, as a proper review of the situation will need adequate time.

I am sure the Minister will agree that many people simply do not understand the system of fees, loans and top-up fees, and that this confusion may dissuade them from considering applying to or even exploring the option of going to universities away from home. While we do not wish to see students amass debts, many are often not aware of what is available to them in the form of bursaries, non-repayable grants and other funds from the Access to Learning Fund. Can the Minister ensure that more is done to make this information more readily available?

It is just and right, as we recognise the need to become a more knowledge-based nation, that our population must be both prepared and able to access higher education. We on these Benches are dedicated to widening access to higher education, and we strongly believe in looking at the different ways people can undertake learning and further studies. But given the uncertain economic times we face—a point alluded to by the noble Baroness, Lady Warwick—can the Minister first give us a strong assurance that the Government will investigate fully, in depth and in detail, the point in time at which to transfer the loan book to the private sector? Secondly, if the Government dither a great deal, as they have in the case of Northern Rock, what safeguards will be in place to control the situation if the purchaser gets into financial difficulties or is involved in undertaking unacceptable practices? With the value of the student loan book at around £18 billion at the end of the financial year 2006-07, the Minister must agree that these are not small sums. Are there any estimates of the value of the loan book for the financial year 2007-08? Can she tell us whether a regulatory impact assessment has been prepared?

Will the Minister also assure the House that concerns would be raised about the possibility of secondary sales to indeterminate groups of people? What safeguards will be put in place to ensure that the purchaser or purchasers are in full compliance with the terms laid out in the sale, and that if the book is to be sold on, that information is made available? The noble Baroness, Lady Sharp, also asked about this. If the information is made available to the Government, will they give instructions that all necessary checks and balances, as well as due diligence, are carried out on the new purchasers before the loan book can be sold on? This is a crucial point that needs to be addressed in detail because if the debt is sold on the open market, as is so often the case, it may end up being sold to an institution that is already underwritten or guaranteed by the Government, like Northern Rock.

Although this is a fairly straightforward Bill, niggling questions keep appearing. How will students who are eligible for loans from the EU be traced? Will a charge be put on those loans, and how do the Government see that being implemented?

Students will of course be concerned that the level of interest on their loans does not suddenly rise. They have already seen the rate of interest charged on loans rise from 2.4 per cent to 4.8 per cent. Many students are already missing out on the experience of moving away from home to study in order to avoid incurring even higher levels of debt. Can the Minister assure the House that measures will be put in place to prevent the purchasers imposing new levels of interest on loans? Drawing a little more on that point, with economic conditions showing some instability, what can the Minister say about the area of active default?

My honourable friend in another place, Mr Tim Boswell, said at Second Reading that this is essentially a Treasury Bill, a revenue-generating piece of legislation to ease the Government’s economic difficulties. Is it the Government’s intention that moneys raised by the sale of loans will go to the education budget?

Which loans will be selected for sale? What formula are the Government going to use or is it to be a random selection? As the Government are looking to raise £6 billion from the sale, what is the total number of loans to be included in the sale? The Government cut £100 million from higher education dedicated to part-time and mature students. Are the Government persuaded to dedicate part of the sales back to support this important sector?

Finally, I should like to touch on the concerns around data protection, an issue which has already been raised. Does the Minister agree that recent revelations of lost data are causing much alarm across the various sectors? It will be equally alarming for students to know that their personal details are to be sold on to a private organisation. What assurances can the Minister give the House of policies and procedures that have been put into place since the Government’s recent difficulties with data going missing or being stolen, and the huge difficulties they face with their IT programmes and systems? I look forward to the Minister’s response.

My Lords, I thank your Lordships for the warm welcome that has been extended to me in my new role. I associate myself very closely with the warm words of tribute to my predecessor, my noble friend Lord Triesman, who played a very important role in championing the question of the Minister for Students. I am delighted to take up his baton in that regard.

The debate has been interesting and important and I am grateful to noble Lords for raising a number of important questions. I hope that I can pick up on them today but, if I do not, I look forward to returning to all the issues raised at the Committee stage. Contributions from all sides of the House have indicated that there is a great deal on which we can all agree. We can all accept that our higher education system is recognised as one of the finest in the world and that we must ensure that such prestige is maintained in the years to come. We are as one in our belief that no potential student should be deterred from applying to university or college because of fears that they will not be able to afford it. There is broad consensus, I believe, that a responsible Government should consider how best to manage large and growing public assets such as the student loan book. It is this latter point that is most relevant when considering the Bill before us today.

The Government do not believe there is a compelling reason to retain ownership of student loans. As I have said, the private sector is best placed to manage these assets and to assume their associated risks. Initiating an ongoing programme of student loan debt will allow us to release vital resources for government priorities and we are sure that it is the best way to proceed. We would engage in such a programme only if we were sure that it could be implemented without a negative effect on the Government’s broader policy commitments to the higher education sector and if its passing would have no impact on the financial provisions for students. The Bill passes both these tests and provides future Governments with the flexibility to conduct sales according to the legal and financial conditions of the day so that transactions represent good value for money.

On the point raised by the noble Lord, Lord Roberts, with regard to powers for Welsh Ministers, as a Welshwoman who is very committed to the devolutionary principle, I feel comfortable in responding to him by saying that, as the responsibility for student loans in Wales has been devolved to Welsh Ministers, it is important that this provision equally applies to Wales. Any decisions on future sales of the Welsh loan book needs to be made in Wales by Welsh Ministers. Clause 8 of the Bill gives them that power. Welsh Ministers are keen to ensure that maximum value for money is achieved for Welsh student loans and that these powers are in place so they can ensure that they do so. The Bill will enable Welsh Ministers to decide when they deem it appropriate to use these powers, bearing in mind the relevant economic and value-for-money considerations.

As in England, money gained from any sale of the Welsh loan book is expected to transfer to the Treasury, as the noble Lord has pointed out, with no direct financial gain for the Welsh bloc. In the same way as for England, that is appropriate as the ongoing repayments from student loans also return to central government now.

I stress that Welsh Ministers may decide that they do not want to leave this loan book risk on their balance sheet. That is a matter for them, and we are giving them the powers to take those decisions at a time that suits them. Again, as in England, it is important to note that any sale of the Welsh loan book will not have an impact on individual borrowers. The loan system will continue to be administered for Welsh students by the Student Loan Company.

The noble Baroness and my noble friend Lady Warwick raised the issue of the use of proceeds—the word “hypothecation” comes to mind. She brought up this question when we discussed the legislative programme and the humble Address. I take this opportunity to stress that the Government have a proud record on higher education funding; there has been a 20 per cent real terms increase in the higher education budget. That contrasts with the 36 per cent real terms cut over the last eight years under the Conservative Government, so I do not accept the lessons being taught by the noble Baroness, Lady Verma, when she refers to a £100 million cut in funding for higher education. We need to be clear on the funding pattern.

We have set challenging targets for the higher education system over the spending review period.

My Lords, £100 million was cut from part-time and mature student education under the Minister’s Government. Will she think about persuading them to put back some of the money that has been cut out of that department? We need that funding back for part-time and mature students who may wish to take a second degree.

My Lords, we are referring to the interesting and hotly debated subject of equal or equivalent degrees. The Government are committed to increasing the spending on the support for people taking first degrees. We believe there is an enormous pool of students who have not been to university who should benefit from a priority in government spending. We will have the opportunity to discuss this further. The noble Baroness is smiling and nodding so, with that, I will move on.

I stress that we have set challenging targets for the higher education system over the spending review period and have made a commitment of resources to make those targets achievable. By the 2010-11 period, the real terms increase in public expenditure for higher education since 1997-98 will have exceeded 30 per cent. In establishing the Department for Innovation, Universities and Skills last year, the Prime Minister made clear the importance he attaches to this country developing world-class skills and research bases to help create new products and markets and drive enterprise and efficiency. Commitment to higher education is a key factor and is at the heart of this drive from the Prime Minister. I hope I can assure my noble friend that I and my ministerial colleagues will, as ever, do our utmost to ensure a good and fair outcome from future spending reviews for higher education.

However, we do not have a legitimate claim to hypothecate the proceeds from the student loan programme. I am sure my noble friend will not be surprised to hear me say that. To hypothecate those proceeds is not consistent with the way in which the Government manage public spending, nor is it consistent with the way in which repayments from student loans borrowers currently feed back into the public finances. The ongoing revenue that government receive as graduates repay their student loans goes not to the DIUS budget, but to the Consolidated Fund, as has always been the case. The use of that revenue forms part of overall government decisions on spending across all priorities. However, I reiterate the commitment that my department has made to continuing to promote higher education and to making a case for further spending.

My noble friend Lady Warwick and the noble Baroness, Lady Verma, pressed me on the timing of the sale. The Bill enables a long-term programme of student loan sales, so we need to think about the market conditions over the long run. However, if a continuation of the current market turbulence translated into poor value for money in any sale of student loans, we would not go ahead with the sale at that time. My noble friend asked whether sales will be possible in the financial year 2008-09. We have been advised that they will. Financial markets have suffered significant disruption since the middle of last year and high levels of volatility and uncertainty remain, but there has been some improvement since December. No one can accurately predict the market conditions at a given time, which will naturally vary for different sales. We will closely monitor the market with a view to launching sales at a time when conditions are more stable to help ensure the good value for money that the taxpayer must demand.

The noble Baronesses, Lady Verma and Lady Sharp, pressed the question of value for money and asked how the assessment might be made. I said in my opening speech that it is essential that we compare bids for selling the loans with the value of holding them. Part of the value-for-money assessment will involve gathering full and clear market information alongside assessing the value of keeping the loans on the public balance sheet. Assessing those values requires a number of projections, as the noble Baronesses will understand, estimating the level of repayments that will be made by borrowers far into the future. We will estimate the rate at which graduates will repay and how many loans will be written off because the borrower has become permanently disabled, for example, or passes away. As these projections have to be based on assumptions and estimates, a degree of risk is built into them. In assessing value for money, we will also take into account the value of transferring that risk from the public sector to the entity which buys the loans. That does not lend itself to a precise equation, so the assessment will need to consider a range of values based on different assumptions and estimated risks.

The noble Baroness, Lady Sharp, raised concerns about the overindebtedness of young people. Student loans should not be confused with commercial debt. I appreciate her concern, but student loans are nothing like credit card debt. For example, as the noble Baroness stressed, monthly repayments are made through the tax system and depend on how much the borrower is earning and not on how much they owe. Grants are available for students from low-income and middle-income backgrounds and are being extended to reach two-thirds of students in 2008.

The noble Baroness, Lady Verma, asked about the review of the student finance system. That review will take place in 2009 and its terms of reference have been made public, but there must be time for experience of the current system to be built in and amassed so a proper evaluation can be made. We are also introducing the new concept of a loan repayment holiday for five years, which could be very important for some students who wish to take time off to have children, and so on. However, we should remember that over a lifetime a graduate earns £100,000 more than a person with two A-levels. That brings with it significant benefits, which I can summarise as the underlying principle behind student loans.

Noble Lords raised questions about EU students. That is an interesting point that we shall be happy to return to in Committee. Clause 1 enables the Government to sell student loans, which are due to be repaid to the Secretary of State, as well as maintenance and fee loans made to people domiciled in England when they take out their loan. That includes fee loans to which EU students are entitled, as the noble Baronesses, Lady Sharp and Lady Verma, reminded us. Entitlement to fee loans for EU students was introduced only in 2006, so there are unlikely to be significant numbers entering repayment until 2010 and beyond. But this Bill is designed to enable a long-term programme of loans and there is no reason why those loans should not be considered for sale in future. There are questions of detail around how the Student Loans Company will work, which I shall be happy to go into in Committee—and I shall be happy to ensure that the noble Baroness, Lady Verma, has as much information as she needs to think about those questions, I hope in advance of Committee.

The noble Baroness, Lady Sharp, and others asked about data. The Bill allows sharing of HMRC data only to the extent that it is necessary for potential purchasers fully to understand and value the assets that they are considering buying and to allow sold student loans to be administered effectively. Potential purchasers can receive only anonymised information. As we plan to require purchasers of the loans to use the Student Loans Company to administer and enforce the sold loans, loan account data would not need to be transferred to the purchasers for day-to-day purposes. In the event that purchasers require access to data—for example, for audit purposes—the method and transfer will be secure and encrypted, after the lessons learnt from mistakes made to which noble Lords referred. Purchasers will not be able to access any wider range of personal data and will not be able to use personal data for any purpose other than administering student loans. The Bill extends a criminal sanction on unlawful disclosure of HMRC data, to protect information on student loan borrowers. That is a strong measure. All data-sharing will be in accordance with existing data protection legislation, including the Data Protection Act.

Onward sales have been an issue in another place and noble Lords have raised it again today. Once the loans are sold and securitised, we expect it to be a rare occurrence that the loans will be sold on. A special purpose company will be created to own the loans and receive the income from them; owning the loans will be one of its few purposes. The main market relating to sold student loans will be in the financial instruments—the bonds issued by the owner of the loans. The borrowers’ primary protection will be that terms and conditions of loans cannot be altered by the loan purchaser. That will apply equally to any subsequent purchaser as to the initial purchaser. That is on the question about the interest rates that the noble Baroness, Lady Verma, raised. In so far as the contract for loan sale also incorporates protection of the borrower—for example, in insisting on the same mediation arrangements as are in place for unsold loans—we shall ensure that the protection continues in the unlikely event of subsequent sales.

Clause 3 provides for ways for the Government to ensure that contractual arrangements for onward sales support that policy. That important part of the Bill was discussed at length in another place. I am happy to put on the record that we will ensure that any onward sales contract continues to protect the borrowers fully.

The noble Baroness, Lady Sharp, asked about transferring risk. For loans that are sold, the purchaser will assume all the risks relating to repayment. Our intention is to sell all the loans for which there is sufficient information for the market to price them effectively. Obviously, it is in our interests in this sale to have different types of risk bundled up together in a range of bonds that will be attractive to potential purchasers. As the income contingent system matures, more and more loans will be saleable by that approach. The noble Baroness will be aware that the report to Parliament that my noble friend will make in another place will allow public scrutiny of the sales as they go forward.

Finally, because I will run out of time, the noble Baroness, Lady Verma, asked about the constraints of data. I picked up on that already but I am happy to return to that and other questions in Committee.

I close by thanking all noble Lords who have contributed to this debate. The Bill is rather technical. I want to ensure that we have explained our approach as fully as possible to noble Lords. I shall be placing a short briefing document in the Library and there will be an open briefing tomorrow evening for Peers at 6.30 pm in Room 3—a little advert there. The expert scrutiny provided by your Lordships' House is invaluable and will help to ensure that this legislation sets appropriate foundations for a flexible ongoing programme while providing appropriate protection for borrowers and for the public purse. In that spirit, I look forward to discussing the Bill fully in Committee and I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Grand Committee.

House adjourned at 5.17 pm.