Yes, minister, but where's the cash?

More graduates, tailored to the jobs market, fine. Lesley Gerard asks Tim Boswell how he plans to fund it

Universities must equip more undergraduates with vocational skills central to economic growth, the Government's review of higher education has found.

The traditional view of university as a halfway house between home and adulthood for privileged 18-year-olds no longer holds sway. A major theme in more than a hundred submissions from institutions, unions and industry was the need to educate a new generation of workers to fill the skills gap, says Tim Boswell, the higher education minister. "In a world notorious for its academic divisions there has been much greater consensus than we expected on vocational skills and continuing learning."

There is also a consensus that economic objectives can only be met if the sector expands. Here lies Mr Boswell's and the Government's dilemma. If they opt for growth, where is the money to come from?

"Expansion of the system has not gone too far," says the minister. "We have a lot to be proud of, but the issue is, how do you tune it to modern needs alongside the resources available? If you are going to have more of it, you are going to have to find ways of financing and resourcing it."

The first phase of the review, launched last November by Gillian Shephard, the Education Secretary, was to reassess the purpose of higher education and the implications of this for its future size and shape. The issue of how to pay for it is for phase two.

Policy-makers will not be able to set realistic targets for student numbers into the next century without grasping the nettle of funding. So Mr Boswell finds himself unable to say how many students should be in higher education by 2010. "I don't know - that is an honest answer, because the outcome is not independent of methods of student support or preferences."

One of the Government's preferences might be to privatise students loans, inviting banks and other City investors to lend the money with interest, instead of the Treasury, which charges no interest. Mr Boswell says: "We have no immediate plans in that direction, but we are keeping our options open."

Under the current system, graduates earning pounds 14,500 (85 per cent of the national average) or more must pay back money borrowed within five years. Mr Boswell said the Government might be willing to review the repayment period. This is unlikely to be enough to please students, who say that annual grant cuts and five years of loans have already led to record debt and hardship.

Since the Government announced its review, there has been a change in attitudes to funding. Labour seems poised to abandon its commitment to higher education as a right for everyone which the state should pay for, and is considering some form of graduate tax or loan. University vice- chancellors favour the Australian model, where students take out loans for maintenance and teaching fees, to be paid back through income tax and national insurance. Even the National Union of Students is conducting a review and is prepared to consider income contingent maintenance loans - which are repayable only when a certain level of income has been reached by the graduate.

Mr Boswell says: "One has to be careful about simply going for a quick fix. Income-contingent loans or the Australian system or whatever you want to call it, could carry risks, and we would have to look at the implications. If you want to tie it to the income tax system, then the threshold cuts in at pounds 3,500. You might, for example, bring it in as a super tax to kick in at pounds 22,000, so that people would be paying back from the top end of earnings. Assuming you want level funding, then the solution rate of tax is very high, one or two pence in the pound or even higher, five or six pence in the pound. The average monthly payment on a student loan is pounds 14 a month."

Mr Boswell says he believes in the positive benefits of further increasing access and attracting a more diverse student body. He believes in vocational relevance above narrow expertise. But he is resistant to calls to lift the current freeze on student numbers next year, two years ahead of schedule. The Government, he says, will stick to its plan to ease the cap in 1998 to allow 3 per cent growth by the start of the next century.

Such cautiousness, Government critics complain, means that the higher education review is moving at a snail's pace when urgent action is needed. They warn that while the Government procrastinates, the economy will stagnate, student poverty will rise and universities will face increasing financial crisis as their unit funding falls. Others claim the review is a red herring, a convenient diversion which can be kept pot-boiling indefinitely.

Mr Boswell dismisses such allegations, insisting he won't be rushed. He points out that Lord Robbins' 1961 review, which set the scene for expansion for the next two decades, took three years to reach conclusions. And here we appear to have come full circle. The first objective of higher education, according to Robbins, was "to provide instruction in skills relevant to future employment needs ..."