Question: You called for a review of student funding. So what's wrong with the current structure?

Margaret Hodge: I think the decision that was taken by David Blunkett in 1998 that students who benefit from higher education should make a contribution to the cost of that higher education is right. Graduates will earn on average £400,000 more during their lifetime than non-graduates. Their average earnings are 35 per cent higher than non-graduates', so a contribution back to the system is right. However, as with any new system bedding down, there are issues that we need to think about and we need also to respond to what people are telling us. I suppose there are a number that concerned us.

Firstly that young people from lower income backgrounds should not be put off going to university because of fear of debt - so we want to tackle that. We were worried as to whether the phasing of the repayments was right; whether there was too much upfront - and we're looking at that. And, I think the system is incredibly complicated and we need to simplify the system so that it's easier for students, parents, families and, I have to say, ministers for higher education to understand. And then the final thing is, have we got the balance right between the contribution of the state and the family in the cost of higher education? So those are the sort of things we're looking at. But the principle that was established in 1998 we stand by.

Question: Do you believe that under the current system, higher education has become more and more a middle class club?

Margaret Hodge: No. I wish it was the funding that was the easy answer to ensuring that there is better, fairer access to higher education. I have no doubt that higher education is almost a right to the middle classes but it has remained a privilege to people from lower income backgrounds, but I don't think the funding is the key to changing that. Firstly, it's raising prior attainment levels. 90 per cent of those who get two A-levels or more go on to university so if we want more we're at saturation point of those with the necessary level 3 A-level qualifications going on. If we want to increase the number of those who go on, we've got to increase the number of those who get that attainment. That means increasing the staying on rate. We've got the worst staying on rate of young people after sixteen in comparison to most of our OECD competitor countries, except for three - Greece, Turkey and Mexico. So we've got to encourage more people to stay on, hence the fourteen to nineteen document to stay on.

Question: Why do you think we have got the worst staying on rate in Europe?

Margaret Hodge: Because there is this automatic national qualification at sixteen of GCSEs, that people feel once they've got through that then they don't need to go through any more, whereas France and Germany have a qualification at eighteen on which greater store is set. Because there isn't a culture in the UK that values vocational qualifications going through - early qualifications into degree - as there is again in some of our competitor countries. I think those are the most important issues.

The other issue that I would say is a really important one is aspiration. I always quote this very important survey that showed over 40 per cent of young people from the three lower socio-economic groups don't think about university as an option for them whilst they're at school, so that means that neither their peers, their teachers, their parents - anybody is saying university is for you. Raising those aspiration levels, raising the attainment levels is vital to widening participation and then of course student funding comes in as the third prong.

Question: Would you ever consider raising the age of school leavers? Margaret Hodge: I don't think so. I think what we've got to do is to convince people of the economic self-interest of staying on. We've started this excellence challenge campaign where we're taking a bus around schools in areas where staying on rates are poor - participation in higher education is very low - and the kids see a video; they do some interactive stuff online; they get talked to. And what is really fascinating is that they have never thought of the benefits to them of staying on in school and going on to higher education both in terms of financial gain, job opportunity and actually having just a good time. You know my university years, just as yours were, were some of the best of our lives. Why should we retain that for the privileged few?

Question: How concerned are you about the level of debt that students are getting into at present?

Margaret Hodge: I'm concerned that the debt should not put off students - young people - from participating. I am concerned about that. And I'm concerned particularly because one knows that working class kids on the whole tend to be more debt-averse than middle class kids.

When I look at the reality of it in the graduate's life, an £8000/£9000 debt against £400,000 additional earnings over a lifetime is not a frightening amount if you think about the mortgages we all take out.

And the other thing is the terms of repayment of the debt are very, very generous. We don't charge real interest on the loan; all we charge is interest that reflects inflation. So it's much more advantageous: you only pay back what you borrowed in real terms. You don't start paying back until £10,000 and then you only pay 9 per cent on every £1 over £10,000. So if you're earning £15,000 you would only repay 9 per cent of £5,000 a year - that's less than £10 a week. So I think it's advantageous interest rate terms and it's geared really to what you're earning. So if you're out of the labour market - if you're a woman having a baby out of the labour market - you just don't pay for a bit. And it's a proportionate part of your income.

Question: But you're looking into the phasing of repayments?

Margaret Hodge: We're looking into it.

Question: Do you think there are ways of phasing it in more proportionately?

Margaret Hodge: There is a whole range of options.

Question: The NUS recently said that students would be better off on the dole because after loan repayments students have just £29 per week to live on - £13 less than they would get through the Job Seekers Allowance. What do you make of this?

Margaret Hodge: The recent Unite/MORI poll showed that nine out of ten students thought the money they were spending was a good investment.

So the first thing to say is there's contradictory evidence around. And the other thing is that only one in ten students were even thinking about giving up their studying on the grounds of the cost. What tends to happen is that people give up because they don't like the course, not because of the cost of studying. All the evidence shows that. I never felt well off as a student even in the heady days when I was one of the very, very privileged few, but you have a ruddy good time and you do get massive financial benefits otherwise.

Let me just say something else which is probably a bit controversial. I'm not too concerned about students doing some part-time work when they are studying.Question: As they do in America?

Margaret Hodge: In America they end up just with fees of over $100,000 - not living costs, fees.

Question: Should we be looking to an American model where students do work in some way?

Margaret Hodge: What we've got to ensure is that there's a proper balance in some way so that the work doesn't impinge on their study.

I'll just say this to you - I've said it to the students themselves, but it's something we all need to get our head around - if you're twenty-two and you weren't lucky enough to do your A-levels at school and you go off to the local FE college to do your level 3 qualifications, you're probably doing 15 hours of contact time a week; whereas students - I know it differs - my kids aren't doing much more than six hours; you're doing all the homework to get to your level 3 A-level qualification; you work full time in McDonalds in the evenings to keep yourself and you don't get a penny off the State. You've just got to balance what's happening there - and that's where a lot of working class kids are at the moment, getting their second chance into A-levels/level 3, and at the moment there's no support from the State there - and yet on the other hand you've got students saying it's wrong that they work part-time. So I think as we move towards a more equitable and fair system we've got to take a rain-check on where we are at present.

I'd also like to quote some stats back to you from the Unite/MORI poll that showed that actually it was a lot of lifestyle choices - which is fine, we're not into defining lifestyle choices. But a lot of lifestyle choices were leading to debt. I think on average those who drank were spending £25 per week on alcohol. Now that's absolutely fine, but should the State pay for that?

Question: Some people have argued that your review of student funding is taking a great deal of time. Scotland and Wales have come up with new ways of funding; the Lib Dems are calling for loans to be ditched; and the Conservatives raised this issue during the leadership battle. Why are you behind the political pack on this?

Margaret Hodge: Because we're the ones responsible for doing the real job not just talking about it. The Lib Dems go on and on and on, but they can't fund it. It is very complicated. I think we have probably looked at seventy different options so far. We want to get it right; we have to make sure it's affordable, within the context of DfES expenditure and then overall government spending; so we're going to take our time to get it right, and I don't apologise for that. We've said we will consult fully on the propositions that we've come forward with and we intend to do that and it's best to get it right rather than rush it.

Question: I'm not going to ask about graduate tax and grants to poor students and all the rest.

Margaret Hodge: Because I'm going to say nothing is ruled in and nothing is ruled out!

Question: But all I'm going to say is when can we expect to see these plans?

Margaret Hodge: As soon as they're ready. And we will consult.

Question: Universities UK argue that universities face a funding shortfall of £500 million per year to meet the expansion of student numbers. What's your assessment of this funding shortfall?

Margaret Hodge: What Universities UK quite rightly say - and that's one of the things that I have to bear in mind as we tackle this difficult issue - is that there are competing demands on the higher education funding pot. There are demands from students; there are also demands from the institutions who have been starved of resources for a decade - they've had a 36 per cent cut in their real terms funding over the past decade. There are demands from widening participation; there are demands from saying that we're going to be teaching a different sort of student if we're successful in getting fairer access and more working class kids in - the sort of support they will need, I think will be different. There are demands from our determination to retain our world class research capacity. So there are a huge range of competing demands on the HE budget from a very sorely under-funded pot and we've got to weigh up those competing demands and that's something that does take time.

Question: You talked about the Green Paper for fourteen to nineteen year olds, and it aims to give greater status to vocational subjects in schools, is this something that needs to happen in universities too.

Margaret Hodge: Yes, I think that's where there is a misunderstanding of the 50 per cent target which we've set ourselves because that 50 per cent target doesn't mean everybody studying Latin and Greek at Oxford for three years; it does mean more people going into university but probably studying a greater variety of things.

Some of the most exciting new degree options I have seen are the two year foundation degrees where there is a co-operation between the employer and the university to set what would be a vocational degree qualification very much about the needs of the employer, so that for the student going into that, if they pass the degree it is much more likely for that to be a passport to a job for them. Everybody gains - the employer, the student and the university.Question: Would you like to see university courses becoming more flexible and shorter, and more vocationally based so you could have people coming in part-time doing a six month, one year course? Is that realistic?

Margaret Hodge: There's a lot in that question. I would certainly like to see universities being much more flexible and I certainly see a growth in the cohort coming out of a lot of part timers. Part time course, distance learner - those sort of things are important.

I also would like in the medium term to do more work around a modular approach to degrees so that people can do part of a degree and then perhaps opt out and then come back into it at a later stage if that fits their life. At the moment that's very difficult because you can't take the year you've done in one institution off to another institution very readily. It's getting easier. So I'd like to see much better co-operation between institutions so that we don't have the sort of fuzzing at the edges about what happens to students at FE colleges and HE universities.

I don't want any of that to lead to a dumbing down of standards. You can have vocational degrees, but vocational degrees of a Higher Education standard. There was somewhere locked into that question that suggested a dumbing down. So we're not going to have a dumbing down, but that doesn't mean you can't have flexibility and variety in education.Question: I mentioned nothing about dumbing down, I would say more - if anything - when this issue of vocational subjects in universities is raised that you sometimes get Higher Education snobbery in some quarters.

Margaret Hodge: I think you get a huge misunderstanding about the variety of offers that ought to be available to meet both our economic demands and our social inclusion demands. I do think you get misunderstanding.

Question: How do you see universities changing over the next five to ten years?

Margaret Hodge: I hope quite radically. What we're looking at - and this is part of our comprehensive spending review and review of what the sector should look like ten years hence - I think up to now the way in which we funded the sector has meant that we have got a one-size-fits-all. You either get money for numbers or you get money for research. And nowhere have we tried to say universities are very different institutions, are good at different things, and we ought to provide funding incentives to enable them to focus on what they do best. So I see a much better focusing over the coming period.

I also see the market developing in a much better way. It is very odd that they claim to be fiercely independent institutions but actually they live in the most planned market I've yet to come across, so in terms of enabling students to make choices and places expand where students want to be rather than where HEFCE decide where they should be, I would like to see a much looser market. That means that I would like to see much greater collaboration over time. Again the institutional settlement of the universities we've got hasn't changed over forty years and it probably isn't right. So maybe mergers, maybe collaborations; maybe collaborations between HE and FE; maybe some focusing on getting more young people into the top universities; some focusing on preparing the students in the first couple of years.

Question: Can you see then movement for this collaboration?

Margaret Hodge: Yes, we will encourage it, again through financing.

I would like to see us competing effectively world-wide, both in attracting students and in distance learning. And I would like to see a development of universities as a key part in their regional economy - not just in knowledge transfer, and growing new businesses, but also for playing their role - for example, improving the public sector in their locality.

Question: And is there any further role the private sector can play in these plans?

Margaret Hodge: I hope so. One of the interesting things if you look at the UK compared to the USA, the university sector is much better endowed than we are in the UK so both individuals and corporations contribute much more to research and teaching in the HE sector. We haven't got a good history on that, and one of the things we are looking at is whether or not we can release some of that capacity to the benefit of the sector, the economy and individuals.