Early payers may yet get a break on fees

Discounts for early repayment of student loans could still be announced this autumn in an attempt to ease pressure on the sector's funding, David Willetts has said.

The universities minister, who originally wanted to use the plan to fully fund 10,000 extra student places next year, said he hoped to announce measures after the Comprehensive Spending Review (CSR), due in October.

As reported in Times Higher Education, Mr Willetts was forced to abandon his plan for funding additional places, announced at the Tory party conference last October, mainly due to time pressures. Instead, the government is following the Labour-instigated University Modernisation Fund (UMF) to finance the places - a scheme described as "fiscal magic" by Mr Willetts before the election, which requires universities to find efficiency savings to meet the cost of the places after the first year.

Mr Willetts told THE that his decision to use the UMF for 10,000 places represented consistency, as he had argued for the extra capacity six months before Labour, which announced the UMF for 20,000 extra places in March.

He said: "At the absolute fag end of the Labour government they magicked up their modernisation fund, claiming that they could fund 20,000 extra places out of it. My view is that it was never a credible 20,000."

Mr Willetts added that compared with Labour's December grant letter to the sector, the coalition government had increased funding and places for 2010-11.

Straight line

Denying that he had taken a U-turn on the funding approach, he said: "It is the opposite of a U-turn, it is a straight line that connects what I said last autumn at the party conference with what is now happening - 10,000 extra places."

The universities minister said that the early repayment scheme would still be considered as part of a review of the student loan book announced in the emergency Budget last month.

He said the "objective" would be to put forward proposals in the autumn, when both the CSR and Lord Browne of Madingley's independent review of higher education funding and student finance are due to report.

Mr Willetts' original plan aimed to raise at least £300 million by offering a 10 per cent discount for early repayments over £500 and for students who repaid their loans upfront (see box below).

Meanwhile, asked if Lord Browne's proposals would now be seen by the government as a way to plug the hole left by cuts in public spending, the minister said that any framework "has to recognise the fiscal pressures and the need to help tackle the overall budget crisis".

He added: "We can't assume universities can all carry on functioning in the future the way they have in the past - and many people in higher education realise that."

simon.baker@tsleducation.com

DO THE MATHS: Expert says the early repayment of student loans is not a paying proposition

The government would make money in the long term from offering discounts for early repayment of student loans only if mainly poorer people take up the offer, an expert has warned.

Lorraine Dearden, professor of economics and social statistics at the Institute of Education, said that at a real interest rate of zero per cent, only the graduates who earned the very most over a lifetime would stand to gain by paying back early.

Although an early repayment discount of 10 per cent would be enticing to graduates, zero real interest means most income groups should wait to repay.

This is because their loan is a subsidy from the government, and they could also benefit from outstanding money being written off after 25 years.

Professor Dearden, who is also a research Fellow at the Institute for Fiscal Studies, said: "With the present system, people would be mad to take the discount with a zero interest rate. The only way (the government) can make money is if the 'wrong' people make those decisions."

She said her models did not look specifically at David Willetts' pre-election proposals, which would affect current borrowers rather than the future graduates in her examples. But she did say such a scheme would bring money forward for the government - which was an important consideration in the present financial climate.

Professor Dearden has also looked at the effect of positive real interest rates in an IFS submission for Lord Browne's review of higher education funding and student finance. She has suggested that with positive rates the government may actually have to stop graduates paying loans back early - possibly by locking them into repayments for 10 years - to keep the system progressive.

simon.baker @tsleducation.com.