Opinion: Selling off the student loan book isn’t such a bad idea

Josh Dixon has written about why he feels selling off the student loan book from the 90’s is a worrying prospect for graduates. Whilst there are rightful concerns raised, the piece fails to clarify some important points about the working of debt and the economic sense behind the most recent sale

The article specifically alludes to the face value of the last student loan book which was around £900 million which was then sold off for £160 million. Whilst this may seem like a massive loss on the most superficial of levels, it is important to understand the other facts around this. The first is that most of these mortgage style loans that were given out should have been paid off by now. This is old debt, that is increasingly hard to collect. This is somewhat borne out by the figures, 40% of people still owing this money have disappeared without trace. Another 46% are earning below the repayment threshold, and thus are not likely to come above it any time soon, with so long passed since their degree. This leaves just 14% who are paying off the loan normally, worth just £126 million if these people don’t disappear or fall below the repayment threshold.

Put simply, this is probably a good deal for government: it receives a big cash injection up front, whilst selling a chunk of money owed that would be increasingly hard to collect.

This also brings up the issue of future sales. I don’t agree with all the conclusions of the Project Hero report, which was commissioned but not released. However, I certainly do agree with the government looking at all ways to raise money for education and to reduce the deficit, no matter how unpalatable some are. It is only with full investigation that we can rule out the worst ideas. I’d argue we can trust Vince and Nick. The former has already given us assurances about future interest rates. I trust them and I hope that trust bears out.

I do agree with Josh that any money made on these sales should be ploughed back into higher education. However,  we should be less dogmatic about issues where it makes economic sense to offload assets. We shouldn’t rule off selling of the Student Loan Books by default. The sale of 90’s debt is sensible and economically just. The same could one day be true for 2000-2013 debt, and we definitely shouldn’t rule that out forever.

* Andrew Emmerson is a Liberal Democrat activist from the North of England

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19 Comments

  • Right, glad to see a Lib Dem admit student loans have a high rate of not being paid back. Now, deal with the catastrophic rise in tuition fees and the loan arrangements. HE is supposed to be funded out of these, but the money recovered won’t be enough because of repayment rates.

  • The biggest concern for me is the behaviour of private sector debt collectors. What assurances do we have that the new owners of this debt will not start behaving in abusive and unethical ways to maximise their return on the investment?

  • I’d bet the companies buying the loans are betting on being able to find some of the 40% who have “disappeared without trace”. I wonder how many people who happen to have similar names are going to be getting threatening letters? What guarantees does the government give that this won’t happen?

  • Richard Dean 28th Nov '13 - 11:22am

    I agree with Jack and David. It is just obvious that the actual value of the loan portfolio will depend on the amount of pressure the owners can put on people, so it needs very substantial monitoring at a minimum. That pressure could potentially last a debtor’s lifetime, and lead to all sorts of improper and unnecessary suffering.

  • daft ha'p'orth 28th Nov '13 - 11:59am

    We justify loan systems in the first place on the basis that ‘it isn’t real debt,’ and use them to obfuscate what is claimed to be essentially just government spending. So far so pusillanimous, but okay. Then a few years later we sell the leftovers off to debt collectors, hardly the best regulated sector as it is, at an impressive loss.

    Sounds like a vote of no confidence in our ability to collect student loan repayments, at a time when we just massively increased our dependency on those mechanisms. Why bother with the loan mechanism if we’re just going to write much of it off at a massive loss? So we can keep the debt collection sector afloat?

  • Lib Dem members should be demanding explanations
    http://www.timeshighereducation.co.uk/news/student-loan-forecasts-consistently-wrong-says-nao/2009449.article

    this has the potential to kill off the UK’s HE sector almost entirely apart from a few elitist institutions which cater to the rich.

    http://www.timeshighereducation.co.uk/news/student-loan-forecasts-consistently-wrong-says-nao/2009449.article.

  • I agree with Andrew Emmerson; it looks like a decent commercial deal to me. Aged debt of this profile is simply written off in commercial practice as it becomes uneconomical to chase. The risk to the Government in employing (and it would basically be sub-contracted to many of the people who will still be involved) people to chase the debt would be significant. All that’s really happened is a transfer of risk. Taking the money today as a known quantity compared to holding on and on for unknown values that are likely to be less seems prudent. There are historic problems with recovering student loans from those who have moved overseas and the horse will have bolted.

    In terms of ethical debt collection let’s not kid ourselves that this is a pretty business. I can’t see any reasons why there should be special conditions that aren’t covered in the OFT guidance. (http://www.oft.gov.uk/shared_oft/business_leaflets/consumer_credit/OFT664Rev.pdf) However the debtors are covered by a unique condition for student loans, an income floor of the median national income I think – so no-one earning less than this, individually, is liable to repay. While there will be people on this level of income who are struggling to get by, they are not in the same category as those struggling with benefit cuts, so hopefully this may ease some concerns.

  • If I recall correctly, 1990s student debt is written off when the person hits the age of 40, so it seems like the government has got a suspiciously high price on this. I want to know if we have actually collected the 160 million in advance or if the has been sold on the basis that they pay only out of what they collect – whether formally or because they have allowed the debt to be sold to a limited liability vehicle that is therefore taking a one-way bet like the railway companies do,

    Yes, student debt often has to be written off. One of the issues with the Browne report system is that it is creating a massive black hole of debt that will have to be written off every year by the government from the 2040s onwards. For some reason, people think creating an obligation to write off someone’s loan in 30 years time is not current government spending and does not need to be accounted for as a liability. No company would be allowed to do its accounts that way.

  • A Social Liberal 28th Nov '13 - 7:00pm

    Simon Shaw said

    “I’m not sure that really matters.

    I used to get “threatening letters” from the TV Licensing people. As I didn’t have a TV I simply ignored them which would be my advice to anyone receiving such a letter who hadn’t had a student loan.”

    That is ok for someone who has a skin as thick as yours, Simon but not everyone is the same. Some more sensitive, nervous, less savvy people will be worrying themselves sick about letters they receive accusing them of dodging payment of student loans.

    Even ex students will come under enormous pressure from companies who are only one up from door to door lenders, having to endure tactics such as storms of letters telling them they could be committing fraud, letters stating their debts coming week after week, phonecalls demanding proof of their low income and even people knocking on their doors.

    My thoughts are this. If there are people out there avoiding repayment of their student loans when they earn the requisit salery, why are government agencies unable to take them to task? Is it that they acknowledge the practices of loan sharks are dodgy but will give them the contracts nontheless?

  • Eddie Sammon 28th Nov '13 - 7:47pm

    Buyers and sellers should never sound too keen to buy or sell. There are always alternatives.

  • Thanks to Andrew Emmerson for digging through this deal and presenting more of the details.

    As per previous deals, I would assume that HMRC would still do the collections and the Student Loans company the day-to-day loan administration.

    About the only real query I can see which hasn’t been raised by others is whether this system of loans and subsequent write-off really proving to be more cost efficient to the taxpayer than a grants based system, where monies are forwarded with no repayment demands.

    The real concern to government must be the 40% of people still owing money who have disappeared without trace.

  • If this debts are so uneconomical variable, why buy them?

    Never trust a man who tells you that debt is worthless.

  • Jack, David, Richard, Social Liberal

    it all depends how the sale is done. If (as is likley) it is done in the style of a secruritisation these issues don’t arrise. As from the debtor’s point of view nothing has changed. The purchaser has bought a cash flow and can’t effect the t&c.

    Project hero was wrong as it looked at sales of the whole book not deviding the whole in to tranches and only selling the safe ones for which their is a good price available, holding the risky ones who may pay out but a sale would generate a rubbish price.

  • Roland

    For the 40% if they have not paid in 12 years the loan becomes unenforceable. They should just ignore them.

  • @Psi
    Sorry I wasn’t clear in my point. As someone giving out loans in the expectation that ‘some’ repayments will be made across a good proportion, it must be concerning that such a high proportion (although are we talking about the percentage of loans within this bundle or total?) of loans have been made to people that have disappeared without trace.

  • jenny barnes 30th Nov '13 - 10:02am

    ” If (as is likley) it is done in the style of a secruritisation ”
    It’s a pity they didn’t split it up into 3-tiers of debt, likely to pay, might pay, toxic waste. and sell it like that. on the other hand I seem to remember something like that in the mortgage market a few years ago, which didn’t end terribly well…

  • Jenny Barnes

    It doesn’t sound quite so dramatic if you instead call it Almost certainly will pay, might pay and almost certainly won’t.

    High risk securitisation is only “Toxic” when people buy them thinking they are valued at Par and transact on that basis.

    Any sensible government would sell the “Almost certainly will pay” as a good price will be available, but hold the possible and high risk. As there won’t be good price available unless wage inflation significantly outstrips price inflation, which would make it sensible for the government to hold on to them.

  • Ross Stalker 2nd Dec '13 - 3:14am

    g – you are being extremely disingenuous in your comment about repayment rates. The pre-98 mortgage style loans are an entirely different animal to the post-98 income contingent loans, and it was only the pre-98 loans Andrew was referring to. The sale of the pre-98 loan book does make sense, because the Student Loans Company simply does not have the resources to chase bad debt.

    There will be some people who will never pay back their post-98 income contingent loans. The system is designed that way intentionally. It was never meant to make a huge profit for the government, but to be roughly revenue neutral. That’s why the government should absolutely not sell off the post-98 loan book for short term gain. Unlike the pre-98 loans collection costs are minuscule because they are taken with tax. The idea of the HMRC collecting debts to give to a for-profit company, instead of the not-for-profit SLC, is absolute madness.

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