Though phasing out parental contributions is desirable, the student loan facility in the early days might best be used mainly to boost student incomes, and parental contributions phased out only when that has been achieved.
Our scheme allows substantial saving on student maintenance, and could be introduced in such a way that there are public expenditure savings from the first year onwards. The scheme thus offers resources for an immediate expansion of higher education.
The savings in public expenditure are very large - with savings of L300 million per year by 2005, and even more if the loan is allowed to exceed half the grant. The real resource savings are almost as large. Thus it is possible to have substantial expansion of higher education in the 1990s and also Treasury savings in the early 2000s, when the demographic crunch comes.
Because the additional National Insurance contribution is small, labour market distortions will be minimal. For those above the upper earnings limit, the repayment is equivalent to a lump-sum tax.
The scheme is flexible: it allows early repayment by grad-uates (or their employers) who wish to do so; and it can accommodate a variety of social policy goals.
Avoiding repaying loans through black economy work will be rare. There is little incentive to evade National Insurance contributions, since one's future benefits are involved. And graduates whose loans have to be written off entirely because they do not earn 20 per cent of average earnings in any single week throughout their entire working life will be increasingly rare. The contract which a student signed upon taking out a loan could include a clause converting it into a mortgage-type loan upon emigration, with debt enforcement through the courts if the government so wished; or the previous contributions or future benefits of defaulting emigrants could be attached.
Since students borrow from private-sector sources and since banks receive a reliable return, the scheme is readily extensible to new classes of students (eg those studying part time, and those currently eligible only for non-mandatory grants) without the need for a battle between the Department of Education and the Treasury.
The scheme accords well with one of the key Beveridge principles. It reinforces the contributory principle and helps individuals to be self-supporting by enabling them to redistribute to themselves at different stages in their life cycle. This is what retirement pensions do. Student loans are an up-front pension. Since the private market does not readily supply long-term unsecured loans it is efficient that there should be some state involvement, at least in providing a mechanism for collecting repayments.
The government's scheme, in contrast, has combined effects of defaults, write-offs and administrative costs that wholly outweigh any public expenditure savings. It would be cheaper simply to give the students the money. (A similar conclusion was reached by a Swedish Royal Commission on their private sector loan scheme.) The cumulative addition to public spending between 1990 and 2027 for the government scheme over the National Insurance scheme is L18.3 billion.
Dr Nicholas Barr, The London School of Economics and Political Science, Houghton Street, London WC2A 2AE (tel 071 955 7482). This scheme won a Social Inventions Award. The government's scheme, in its first year, spent almost L13m giving out a mere 180,000 loans worth a total of L70m; ie, on average, an administrative cost of L72 per L388 loan.