Enterprise and Lifelong Learning Committee,

Meeting date: Wednesday, May 3, 2000

Official Report 223KB pdf

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Subordinate Legislation

We now move to item 2, which is the Repayment of Student Loans (Scotland) Regulations 2000 (SSI 2000/110). Members have been given an explanatory note by the clerk, a copy of the statutory instrument and a note from the Executive, which has been provided by Gillian Thompson, whom I welcome to the committee.

The Subordinate Legislation Committee considered the Repayment of Student Loans (Scotland) Regulations 2000 yesterday. We have to receive a report from the Subordinate Legislation Committee before we can consider an instrument. We had expected that the clerk would give a verbal presentation of that report. The clerk received a report from the Subordinate Legislation Committee, but—my notes tell me—the consideration of the instrument was not without controversy. The regulations aim to empower Scottish ministers to recover loans from students, but the Subordinate Legislation Committee believed that that may be beyond the legislative competence of the Parliament. That committee has resolved to consider the matter further and, perhaps, to make representations to the Executive.

We had hoped that we would consider and complete this matter today, but we will not be able to do that because we do not have the final advice of the Subordinate Legislation Committee. However, the matter is on the agenda today and we will consider it as far as we can. As a result of this discussion, it will perhaps be a briefer item on our agenda next time.

I invite Gillian Thompson to introduce herself and her colleague, and then to make a statement to the committee.

I am the head of student support policy in the Scottish Executive. I am accompanied by my colleague, Jim Logie, who is from the office of the solicitor to the Scottish Executive. I will deal with issues of policy and general direction. As Jim Logie drafted the instrument, he will deal with legal issues. We are aware of the outcome of the Subordinate Legislation Committee's discussion yesterday. We provided that committee with advice in response to questions that were asked about the legal powers of Scottish ministers.

It may be helpful to set the scene about our position on this instrument. Income-contingent loans were introduced in 1998 as part of the new package of student support. That was a change from the previous, mortgage-style loan arrangements for student support. It was decided then that, largely for administrative reasons and because a lot of work was being done on other matters, the repayment of loans would not come into force until April 2000. Eligible students have taken out income-contingent loans in the two academic years since 1998.

These regulations are the first that Scottish ministers have made under the Education (Scotland) Act 1980 as amended by the Teaching and Higher Education Act 1998. They deal with the timing of repayment, the cancellation of loans and repayment by overseas residents. To get a clearer picture of the overall collection arrangement for Scotland-domiciled students—the eligible students—it is necessary to read the regulations in conjunction with the Education (Student Loans) (Repayment) Regulations 2000, which are the UK regulations that specifically confer functions on the Inland Revenue.

Loans will be collected through self-assessment and employers—both of those ways are linked to Inland Revenue tax collection—and, in the case of students who go to live overseas or who are outwith the tax arrangements, through the Student Loans Company.

In putting together the overarching arrangements for income-contingent loan and collection, our starting position was the arrangements of 1998 and the discussions that we had with colleagues in the Department for Education and Employment and the Inland Revenue. Our basic premise was that the loans collection system would be done on a UK-wide basis for reasons of administrative convenience, cost and so on. Through negotiations, the Inland Revenue agreed to do that on behalf of the education departments.

Since that time, the scene has changed somewhat. We now have devolution and student support is fully devolved to the Scottish Parliament. We advised Scottish ministers of the difficulty that they do not have powers to make regulations that confer duties on the Inland Revenue. The Taxes Management Act 1970 was changed specifically to allow collection of income-contingent loans.

On the basis of that advice, Scottish ministers agreed that the collection regulations would be made on a UK basis and that Scottish ministers would make a slightly shorter set of regulations governing those areas that were outwith the powers of Westminster.

I am looking at point 4 of the note that you provided us with, Gillian. In what circumstances would ministers decide not to use the Inland Revenue? You spoke of people living overseas and being caught by the SAAS. If someone were within the UK tax system, would Scottish ministers just leave it to the Inland Revenue to collect that money?

It is presumed that the Inland Revenue will collect from anyone in the tax system unless the loan is of a very small amount—less than £120—as referred to in regulation 5. In such a case, the money would probably be collected by the Student Loans Company. The only other circumstance in which that would happen would be people living overseas.

Looking at these regulations without the other legislation is difficult because—as you have explained—you have to pick up the bits that have not been covered. The convener has clarified the point that we cannot rely on the Inland Revenue for collection from overseas residents and that other arrangements will have to be put in place. Regulation 12(3) says that

"Scottish ministers may determine that a student loan shall bear interest at three times the rate or rates which would otherwise be applicable during any period".

I would have thought that that was penal and therefore unenforceable.

That applies if the borrower does not provide the required information, in which case they may be required to pay the amount at a rate of three times the normal rate of interest. As far as I understand it, Scottish ministers would have the powers to bring that about through the Student Loans Company.

I am interested in the broad question of enforceability, because what you have described sounds penal, and under Scots law you cannot recover penal interest.

What is the definition of penal interest?

It is punitive, John. You can recover contractual interest where the rate has been agreed and you can recover interest at the prevailing rate of bank interest, but my understanding is that if a penalty measure is suddenly introduced it is unenforceable. I may be quite wrong; I am just raising the point.

We are satisfied that the regulation is enforceable. The interest rate on student loans is set under regulations. Normally, it would be set in what we have referred to in these regulations as the loan regulations. There is a provision for a certain rate of interest to apply to the loans.

That is perfectly acceptable.

That is really the same power that flows through into regulation 12(3), giving us the power to set a different interest rate in certain circumstances. When the student has failed to give us the proper notice that would enable us to collect the repayments, he pays interest at a higher rate than does the student who has given notice and therefore enabled us to collect.

We will have to re-examine this issue, so perhaps a brief note that sets out some of those points would help to clarify things.

Perhaps specific advice should be taken on the matter.

We should take some comfort on the issue. Perhaps we could share some of the legal advice that has been given on that point.

I was interested to learn about the situation in England and Wales and Northern Ireland for students who are domiciled outside the UK. Does the situation here mirror what is happening elsewhere?

Yes, in every respect.

I want to follow on from Annabel Goldie's point. My understanding, which could well be flawed—it is a long time since I studied at university—is that a rate of 48 per cent is, prima facie, unenforceable and excessive. Of course, if we went back to the interest rates that prevailed following Mr Lamont's chancellorship, that rate could be reached if the three-times figure were to apply. Be that as it may, it seems unduly punitive and burdensome for a student to suffer such a penalty. I do not recall anyone mentioning any hint of that during any of the debates in Parliament.

The case that I want to ask about may be answered in the principal regulations. It concerns the plight of a constituent who states that they have sent the required information to the Student Loans Company—in Glasgow, I believe—but the company disputes whether the information has been sent. One can imagine that there will be many such disputes because former students, perhaps some years after university, will obtain an income of more than £10,000 and will have forgotten about all this. I suspect that there will be floods of disputed applications and matters of fact about whether students have supplied the relevant information.

Are you on a retainer, Fergus?

My question is—

I am glad that we have reached a question.

Is there any discretion so that each situation can be looked at on its merits and the penalty disapplied if it appears fair and reasonable so to do, to avoid penalising people who find suddenly that they fall foul of the rule?

I would expect the Student Loans Company to exercise a certain amount of discretion in such cases. That is a matter for the Student Loans Company.

It has assured me that it does not have that discretion under the current rules. The chief executive assured me of that.

It is difficult for me to comment on a specific case without knowing the full details. The Student Loans Company works to the regulations that are in force. I would have expected the company to take into consideration whatever details had been provided of the individual's circumstances.

I know that when one talks to the rural affairs department about things such as integrated administration and control system—IACS—maps, it says that it does not have an inch of discretion, because the framework is fixed. Does the Student Loans Company have discretionary powers?

Probably not in the same sense that the Students Awards Agency has discretion, because of the nature of the regulations. However, regulation 12 says that in the event that the required information is not provided, the borrower "may" be required to repay the amount. I would have thought that the loans company would be able to argue that it had taken the view that that was not appropriate in the circumstances.

I want to discuss regulation 13. When was the income threshold, at which students would start to repay their loan, reduced from £16,000 to £10,000? Could such a decision be taken only at Westminster, or does the Scottish Executive have any influence over the figure?

The previous threshold was related to the previous loan arrangements, under an entirely different system of both making the loans and collecting repayments. Under the previous student support arrangements—before 1998—students took out loans under what were described as mortgage-style loans arrangements. Continuing students are still doing that. Under such arrangements, when students reached the threshold, which was the average earnings in a particular year—it is more than £16,000—they had to make repayments, usually over five years, depending on the number of loans that they had.

The arrangements that were introduced for income-contingent loans are entirely different and separate. The threshold of £10,000 was agreed in negotiation with the Treasury and colleagues in the Department for Education and Employment. It may be helpful for the committee to bear in mind the fact that those negotiations took place in a different environment, before devolution. At that time, the threshold of £10,000 was regarded as inescapable. If Scottish ministers were minded to change it, they would have to take a number of factors into account, not least the collection arrangements, which are set on a UK-wide basis for a given threshold through the Inland Revenue. The Inland Revenue might not be prepared to collect at a different threshold. There is also the issue—which I do not understand fully—of the financial impact of collecting loans at a threshold above £10,000. That would have an effect on how quickly loan repayments could be brought in. In light of those issues, ministers might decide that they could not change the threshold. Does that answer the question?

I do not think that it is clear who has the power here.

Am I correct in thinking that the same framework will be used for the graduate endowment?

The proposal is that students will be offered the opportunity to pay back their graduate endowment through the loan collection arrangements.

I do not want to misinterpret what George Lyon is saying or to put words in his mouth, but I would be interested to know whether the Parliament could revise the figure of £10,000 or whether we are dealing with a mechanism put in place by Westminster that the Parliament cannot alter.

It all comes back to the question whether Scottish ministers have the power to change the threshold and the collection arrangements that are currently set.

That is the point.

If the repayments were to be collected under the current collection arrangements, the threshold of £10,000 would have to remain.

Are you saying that if we wanted to increase the threshold, ministers would have to make arrangements to collect repayments at that different level?

They would have to consider a number of issues, including the cost of making such a change. I must confess that I am not entirely sure that we would not still be subject to Treasury oversight of the threshold.

Could you—

Is this the George Lyon show?

Mr McNeil, you will get your fair share of questions.

I am trying to get to the bottom of something.

He is speaking out of turn.

No, he is not. He has my permission to speak.

I am trying to have a point clarified.

We would like a note clarifying this issue. It has nothing to do with this statutory instrument per se—

Well, that is what I am saying.

We must be clear about the status of the statutory instrument before we proceed. If the £10,000 is an implicit part of the mechanism selected by ministers for the collection of the graduate endowment, we should find out whether that is amendable by the Scottish Parliament or whether another mechanism needs to be sought for that purpose.

Another mechanism would have to be sought.

Okay.

That answer might be helpful, because I am just trying to find out where we are. Does the statutory instrument deal with loan arrangements that have been agreed in the past couple of years?

The Convener indicated agreement.

In that case, does this statutory instrument change any of those understandings or contractual agreements? Do people clearly understand the agreement that they entered into?

Yes.

So why are we questioning that agreement or contract with people? Furthermore, how does that link with future arrangements, which I did not know that we were discussing this morning?

There are two issues to address, the first of which relates to Annabel Goldie's point about regulation 12(3). If an individual enters into a existing contractual arrangement in which they know that, if they become an overseas resident, they will have to pay interest at three times the rate if they default—

Is that the case?

My understanding is that, if these are existing contractual arrangements, an individual who entered into them would have effectively consented to the type of penal interest—to use Annabel Goldie's phrase—outlined in regulation 12(3).

A student who decides to take out a student loan signs up to the arrangements surrounding that loan when it is taken out. These loans are made not under the credit agreements, but in a different way. When a student applies for a loan, they are sent a booklet describing the arrangements for collection and the terms under which they have signed up for repayment. As a result, they should fully understand current repayment arrangements. The reason for the time lag is that we decided that no loan under the new arrangements would be payable until April 2000. Besides the administrative issue involving time and so on, very few of the students who took out loans since 1998 would be able to make repayments.

Does that mean that some people will have taken out loans without being clear about the repayment mechanism?

No, because we were formalising arrangements with the Inland Revenue in that period. However, information about the £10,000 threshold, the 9 per cent rate of repayment and its collection through the tax system has been available to students who took out loans in 1998.

The only part of the regulations that would have effect in Scotland would be repayments by overseas residents. Are students who have taken out a loan, but have since moved abroad and do not respond to the department's attempts to recover the loan, aware that punitive interests might be applied in an attempt to recover that sum?

The answer must be yes. The Student Loans Company has mortgage-style loan arrangement mechanisms for pursuing people who default.

As I said at the outset, we cannot move to a conclusion on this item until we have the view of the Subordinate Legislation Committee, which we will receive shortly. If I can ask for the follow-up information that we requested to be sent on to the clerk, we can come to a judgment on this subject as soon as is convenient.

As this is a negative instrument, it will come into force on 16 May. I am concerned about the time constraints.

We will examine this again when the committee meets on Wednesday 10 May. Is that agreed?

Members indicated agreement.