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The way is open for the universities to set up an independent body to run student loans. They would benefit from immediate access to tuition fees. The government could take loans off the PSBR

It must be galling for the Government. Having bitten the bullet of university tuition fees and lost a lot of goodwill in the process, it still seems to have a funding crisis on its hands. At first sight, this appears absurd - all that extra cash flowing in, and yet none for higher education.

The Commons select committee has been trying to understand how the black hole arises. Its report published yesterday is no easy read, but well worth the effort because it offers an imaginative way out. This solution, however, will require a boldness from the universities which may be beyond them.

What then is the problem? It will be remembered that the Dearing committee warned that unless an additional pounds 900m is found over the next two years to make good some of the past and planned future cuts in university funding, "the long term well-being of higher education [will] be damaged".

On present estimates, students' contributions to fees and the phasing out of maintenance grants should yield pounds 400m in the coming year and pounds 850m the year after - ample, you would have thought, to make up the deficit. The catch is that most of this new cash is to be covered by loans, that is, money borrowed by the government and lent on to the students.

Financing for student loans pushes up the public sector borrowing requirement in just the same way as that for grants. It is only when the loans are repaid - scheduled over 20 to 25 years on present plans - that money is released for the government to spend on higher education or whatever else it chooses.

Nick Barr and Iain Crawford of the London School of Economics have forcefully argued that loans and grants are patently different and classifying them separately, as Australia and New Zealand have done, would release a "pot of gold" for immediate spending. However, not unreasonably, the Treasury has retorted that borrowing is borrowing, and has to be scored as such.

In fact, while rejecting the idea of "a quick fix", the Government appears to be moving in a direction not so very different from that advocated by Barr and Crawford. It is intended that, from 2001-2, the accounts of central government, like those of the private sector and local government, should be presented on a resource rather than a cash basis. This will entail, as I understand it, public expenditure being recorded as consumption over time rather than as spending in a single year.

Under resource accounting, only the subsidy element of student loans will appear as spending. This method also makes it clear that borrowing for student loans is "good" borrowing, in the sense that investment in human talent can be regarded as a form of asset acquisition.

The select committee supports the change to resource accounting and wonders whether it could be brought forward to student loans in advance of the proposed full-scale introduction. But it also identifies another and potentially more rewarding option for the universities.

Borrowing for student loans is only a problem for the national book-keeping if it is government borrowing. The universities do not fall within the public sector for accounting purposes. Any money raised against their assets is not classed as public expenditure.

The way is thus open, the committee suggests, for the universities to set up an independent body to run student loans. If the government were to underwrite bad debts, the universities' borrowing on the markets could be at a favourable rate. The universities would benefit from immediate access to tuition fees and in the long-term from maturing of the loans. The government would not only be able to take student loans off the PSBR, but the costs of meeting bad debts would be well in the future.

The select committee emphasises that careful analysis of the proposal is needed. Much depends also on whether the universities could afford to operate such a scheme and whether they have the will to do so.

But action there must be. The Government has responded to the Dearing committee's dire warnings by contriving to find another pounds 125m for the universities next year (the other pounds 40m in the headline figure is committed elsewhere). The accounting device that released this money can only be used once, so for the following year, according to the Secretary of State, "that is a debate still to be had".

It would be ironic indeed if, after the struggle to get tuition fees accepted, all that the newly created customers found when they got to university was not a brighter future but the deteriorating fabric - both intellectual and physical - that has characterised much of higher education in the past decade.

The writer is professor of policy research and director of the Centre for Education and Employment Research at Brunel University.

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