For the first time in five years, the UK has seen a 4% rise in unsecured borrowing – the figure now amasses to an eye-watering £216bn. A report by Price Waterhouse Coopers revealed that this £8.5bn rise was almost entirely due to the rise in student borrowing. Students starting University, on average, are set to be straddled with debt that of £40 – 50,000.
As a graduate, already worrying about clearing my debt, the Government has given me more cause for worry. This week, the sale of the mortgage-style student loans taken out between 1990 and 1998 took place. Despite a face value of £890m, the sell-off amounted to £160m. This is potentially a huge loss of money that could have been returned to the Treasury. David Willetts, Universities Minister, says that this move was to help “reduce public debt” – a quote I would like you to remember.
You may be wondering why I should fear something that has only affected those who took out loans between 1990 and 1998, but there is reason to fear. Danny Alexander made a statement in Parliament this June where he was clear the Government intends to sell off student loans taken out after 1998. He said: “We will take action to sell off £15 billion worth of public assets . . . £10bn of that money will come from corporate and financial assets like the student loan book.” The Government website states that: “The Government is in the process of exploring options for the potential future sale of the Income Contingent Repayment loan book.”
The estimated face-value cost of the loan book is £40bn. Now notice that £10bn (of which the student loan book is only a part) is considerably lower than £40bn. The Government is not just intent on risking a loss of billions, as even greater concerns lurk behind this. Despite assurances from Vince Cable that the interest rates cap would not be removed, graduates should be weary. A secret Government report named ‘Project Hero’, revealed that interest rate caps should be raised or removed altogether to make the sale of the loans more attractive – potentially straddling graduates with higher debts than they agreed to. In comments to a Select Committee in June, David Willetts argued that the loans’ terms could be changed at any time. More sinister still, the report suggested what sort of rhetoric the Government should use to sell it to the public.
When going to University, I never imagined the debt I built up could become part of a sell-off to “reduce public debt”. I was led to believe I paid fees to cover the cost of funding Higher Education. I may not speak for others but I refuse to accept I should carry a heavier burden of helping to fill holes in Government spending because the Treasury can make a quick buck off of the back of my debt. If students are to bear the brunt of education costs, our fees should go back into funding a decent, accessible education system. In an ideal world, it would be one that does not lumber graduates with huge debt. Like others, I continue to stand for scrapping fees; former party policy and a vision that does not devalue graduates. While that debate is for another day, I want to see our party stand up for graduates and fight this sell-off.
* Joshua Dixon is a member of the Liberal Democrats' Federal Executive writing in a personal capacity.
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29 Comments
Glad I paid mine off when I got the settlement from my ex, then.
The value of the existing £40bn student loan book is certainly more than £10bn and would be way more than that if the rates were allowed to rise to 2012 onwards levels.
You may assume that it means the government have some conspiracy agenda to flog it off cheap to their mates but it seems more likely that it’ll either be sold for way above that and help to pay for other Lib Dem programmes in government or that only a small chunk will be sold off, such as those that the government can’t track down from ’98 onwards.
You say that you’d like your money to go towards funding education and not to some shadowy private company. That’s the whole point of the sell-off. The government will only sell it if they believe they can make more by selling it than they can by keeping it.
Keep in mind that the sums aren’t quite as straight-forward as they seem though. If the government actually sold it for a good amount and got £25bn and put that towards the deficit then we’d see a reduction in the annual amount charged to service our debt of around £1bn/year.
“You may assume that it means the government have some conspiracy agenda to flog it off cheap to their mates ”
Now why on earth would anyone assume that? After all, this government is probably the most honest ever, keeping all their promises, on the side of the poor and disadvantaged…
Oh btw. It’s “saddle” not “straddle” and “wary”, not “weary”
“This week, the sale of the mortgage-style student loans taken out between 1990 and 1998 took place. Despite a face value of £890m, the sell-off amounted to £160m.”
I assume you were not a student of economics. Only 14% of people are paying back their loans properly, 46% are below the earnings threshold and 40% are not repaying as much as their should. In addition money recieved in the future is worth less than money now.
These are two *very* different discussions. What has been “sold” this week is not an investment waiting to be harvested, but the “bad and doubtful” debt of a previous maintenance loan regime that will be hard work for a recovery agency, tied, as it is, to making no change to terms and conditions, to get much more than it paid back on them. This is standard practice. The SLC is not a collections agency and nor should it waste its precious resources on chasing 15 year old non-performing debt.
The sale of the post-fearing fee and maintenance debt is a very different prospect. There they will be selling a bundle of loans as an investment and there are provisions in the agreement students at the time signed that permitted changes to the terms. But let’s not conflate standard debt management practice with “flogging off the silver” (if the student loan book can ever be described as “silver”).
Post-Dearing, of course. Autocorrect is not your friend.
“A secret Government report named ‘Project Hero’, revealed that interest rate caps should be raised or removed altogether to make the sale of the loans more attractive – potentially straddling graduates with higher debts than they agreed to. In comments to a Select Committee in June, David Willetts argued that the loans’ terms could be changed at any time.”
This is always worth bearing in mind when people try to claim that the new student loans system is “a graduate tax in all but name” and so forth.
Tommy – This sell off is purely about reducing debt. As pleasing as this sell off may look to some, it is occurring as part of a series of sales to go towards a short term economic fix. There has been no long term consideration for the funding of Higher Education which is a sector of education that has already had to deal with considerable cuts. I want my fees to go back into funding education so it can remain sustainable for the future, I do not want to it inflating the profits of a private company that has no interest in improving education whatsoever.
Simon – BINGO! I did not study economics. But neither did a number of key figures behind huge economic decisions in this government. You are correct to mention that only 14% of those paying back under the mortgage-style loans have paid back their fees. I am not too sure, however, how you could possibly know the future repayments from graduates under loans taken between 1990 and 1998 though. I’d be intrigued to see how you know the money received in future will be less than what it has been sold off for.
Jenny – I had not realised I had even written “straddle”! Will keep a closer eye on my spelling in future!
Also, another major concern with this sell off is the complete lack of consultation between government and pretty much any experts or key thinkers in Higher Education. The Project Hero report came from a financial advisory group. Does that not worry anyone? Also, people remain suspiciously quiet on the potential of the cap on interest rates being raised or removed on all post-98 loans.
Just to give an example of how misleading the “face value” of the old loans could be: I graduated in 1995 with a student loan of about £2,000. Sadly, I have never earned above the threshold to pay it back. I think I made one payment by mistake, so they got £33 out of me; other than that, I’ve been deferring every year, whilst the nominal value of the outstanding loan rises. If my financial circumstances don’t change radically in the next few years, then the loan – which is approaching £3,000 nominally, I think — will be wiped out in 2020, if I remember rightly. Pro rata, then, somebody’s just paid about £500 for the right to send me letters and forms every year for the next seven years and finally a letter to tell me I don’t owe them anything.
Whilst the amounts involved are much smaller, this sale of the future income from Student loans has a lot of parallels with mortgage-based CDO package, which were at the heart of the recent sub-prime and banking meltdown…
Whilst this sell off does effectively reduce debt, the government still has £730m (£890m – £160m) of student debt on it’s books. Obviously without knowing the rate of repayment, we don’t know what the actual saving in debt servicing the government is likely to achieve from this transaction, but it could amount to a few hundred million over the course of the loans.
No, that is not correct I think Roland. They have “sold” (in fact it’s a factoring exercise rather than “selling” an investment) loans with a face value of £890m for £160m to a collector (a “factor” we used to call them), not an investor. £124m of those are currently “performing” and the remainder are not currently paying any or all of their required repayments. So the collection company, assuming the £124m continue to repay on schedule, have paid £36m for the right to try to collect about £765m of “bad and doubtful debt” which they will have to work hard to recover more than a small percentage of. If they collect five pence in the pound they might break even, assuming the currently “performing” tranche continues to do so in full. And there is a finite term for them to do so (loan dates plus 25 years or whatever it was that people signed up to – so a maximum of about ten years left.
This is not the same thing as parcelling up a loan book as a bond for an investor. But collections work that every business, public or private, has to take a view on at some point whether it’s worth them continuing to try and collect their bad and doubtful debt or to farm that out commercially.
“The government will only sell it if they believe they can make more by selling it than they can by keeping it.”
But OTOH private companies will only buy it if they believe the government is undervaluing it so they will make a profit on the deal.
As the Royal Mail privatisation debacle shows, getting a good deal for the tax-payer is of much lower priority to the government than getting the money in the here and now to fund tax cuts and superficial deficit reductions in time for the next election. Given the choice between £1bn now or £4bn by 2020 Osborne is always going to pick jam today and let the tax-payer pick up the tab.
It is worth stressing that the face value of the loans is not what they are actually worth. A big chunk of the income-contingent loan book is bad debt – estimates vary, but I think the government is currently assuming around a third for the newer loans. This is because the loans are on extraordinarily generous terms. So immediately we can chop a third off what the government might hope to receive, either by holding the loans or by selling them.
The loans being sold now, as others have pointed out, are overwhelmingly bad debt, so in this case the face value is of little relevance to this debate. It may look like a loss, but actually the loss has already happened.
What people are forgetting is that these private buyers would not simply take a deal that is good for the government. Why would Erudio step in in the knowledge that it wouldn’t make at least £160m? I mean, maybe I’m missing something here?
Also, £160m is of course going to look tasty to the government in the short term, but the long term problems of such a sell off are being completely avoided by individuals in support of this move. In essence the sell off is an admission that this way of funding HE is unsustainable, or at the very least troublesome for the government.
Thanks Jock, I was skating about on little information…
@Passing through re: “Osborne is always going to pick jam today and let the tax-payer pick up the tab.”
Some how I get the impression that these deals have a lot in common with PFI/PPP, as with PFI we got jam today (new hospital etc. for peanuts) and let the taxpayer pick up the tab some years down the road.
For what it’s worth, I was a student between 1996 and 2000. My five grand of student debt (all now paid off) was sold to a private company under Labour. I didn’t notice any difference. I’m surprised to be honest that there is any debt from this period left to sell.
student loans should remain with the Treasury so that the repayments can be via deduction from salary by PAYE. The point of that from the student point of view is that, unless they reach higher levels of earnings, many will never pay off all they owe. The point from the LibDem point of view, with our underlying belief in scrapping tuition fees, is that it can be changed into a graduate tax, as it should have been called in the first place. Danny has been talking to too many Tories.
What is perfectly clear is that the government is indeed appalling at financial management. Compare with the merchant banks, who took loads of dodgy debt, sliced and diced them and then packaged them in CDOs before selling them to the more credulous parts of the financial sector at a substantial profit. 🙂
In the words of one Vince Cable, the student loan to cover fees ( as opposed to living expenses) currently at £ 9000 or so, presumably depending on the fees being charged, is not a loan as such, but an advance against the payment of a graduate tax,once the graduate is earning in excess of a given minimum wage / salary,whatever that might be at the time of graduation. He was quite forthright in making the point that it was not a loan, and should not be seen as such. When I asked him who picked up the tab,so to speak,when no graduate tax was collected, he bluntly stated,” you, the tax payer” of course. Is this how the Treasury sees this?
Peter Tyzack – Danny Alexander basically IS a Tory. I can’t wait to see him lose his seat in 2015 (here’s hoping).
I borrowed about £11000 between 2000-03 and haven’t paid any of it back. I’ve no idea what my debt currently stands at or when it will be written off. I have had no contact from the student loans company.
@andrew purches “He was quite forthright in making the point that it was not a loan, and should not be seen as such.”
Except that the amount owing increases as interest is applied, and payments cease when the loan is paid off, and it can be avoided by students who choose to pay up front or minimised by graduates who choose to pay it off early, and those who fail to graduate must still repay it, and it is administered by the Student Loans Company, and the government calls it a “Tuition Fee Loan”. Apart from that, it’s obviously not a loan. 😉
Would it have been a worrying prospect if the selling price was twice as high? People need to move beyond this public versus private debate. It’s mostly about price.
Eddie, this has nothing to do with public vs private and everything to do with the government making a quick buck off the back of graduates for the sake of short term debt reduction.
I think it is partly to do with public versus private, because the analysis looks biased.
I don’t want to get into an argument, my feedback is just for more objectivity. Maybe the public versus private debate matters more than I think, but I don’t see enough hard headed analysis.
But that’s the point a number of us have been trying to say in this thread. In *this case* it is not about that at all. It is about standard business practice of a creditor factoring out collections of the bad and doubtful debt so they can free up resources to concentrate on other, newer, more important things for their current business.
Roland
Re: CDOs they are not of them selves a bad thing th
ing. They can be very useful, for example in these circumstances using a CDO structure could produce a much better outcome than the options considered by Project Hero. By bundling loans and dividing the cash flows would allow the high value ones (the early repayments) to be sold for a good price.
The low value parts of the loan book would not fetch a good price as they would depend on macro economic factors (if wages rose considerably faster than inflation) so shouldn’t be sold as the price would never be sufficient.
As Jock points out factoring (as in the case of old mortgage style loans) is different and carried out for different reasons.
Joshua Dixon
“When going to University, I never imagined the debt I built up could become part of a sell-off to ‘reduce public debt’. I was led to believe I paid fees to cover the cost of funding Higher Education.”
The fees you paid was to cover the cost of higher education, the money that was borrowed and forms part of the national debt. There was no suggestion that on top of the initial fees they repayment would then also be directed to hire education too. There is a case that can be made for increased funding for higher education but it is not that once money has been borrowed once it has to be spent again.
If you are concerned that Politicians will change the T&C of loans, I would be more confident that their incentive to do so would be reduced if the high value tranches were securitised and therefore it would become more politically impossible to do.
Perhaps I shouldn’t be surprised that this issue is discussed as if the only important aspect was the county’s finances. For me the story here is that the government has no hesitation in forcing its young people into the hands of debt collection agencies. The way these companies harass innocent people as part of their normal business procedure is legal but immoral. I will never support any party that could be so callous.