The announcement that the government intends to sell off part of the student loan book is perhaps no surprise, but it is bad economics. Debt from student loans is currently a groaning £46.6 billion on the government’s balance sheet. The government has already made very clear its intent to further privatise the UK’s higher education system.
The argument is simple. They want to convert an extended stream of income from student loan repayments – which are paid by graduates at a small proportion of their income each month, thus drip-feeding repayment to the government for up to 30 years into the future – into a one-time payment now. This would immediately lower the public debt number. It is a simple move of income in the future to income today.
But the truth is that selling the student loans book in this fashion is bad for students, bad for taxpayers, and may even undermine the entire ethos of the higher education finance system.
Perhaps the most inflammatory argument against the sale of the loan book comes from students themselves. February saw a week of action against the move, co-ordinated by the Student Assembly Against Austerity. Their concern – which is shared by others such as the National Union of Students – is that in order for the sale to be attractive, the government will have to offer a number of sweeteners to any potential buyer.
For example, interest rates on loans could be retrospectively increased, or students may find themselves having to pay more each month through a lowering of the threshold when they must start making repayments.
The government has made repeated assurances that “terms and conditions, including the calculation of interest rates will not be altered to the detriment of borrowers as a result of any sale”.
In other words, the government will not make loans more expensive by increasing interest rates or the repayment threshold in order to secure a sale. They have also stated that loans will still be collected via the Student Loans Company through the payroll. So, graduates who have had their loans sold shouldn’t notice any difference.
Of course, the government could change their mind about this further down the line, but this seems unlikely. It has never happened in the past – new changes have always only affected new borrowers, and a reversal of this would likely have huge political consequences.
Beware the debt collectors
But there may be other reasons for students to be concerned. It is well-known that private companies are better at collecting debt than the government is. Tactics that governments might baulk at (such as sending the bailiffs round to repossess a defaulter’s personal goods) may be more palatable to professional debt collectors.
Whether this is a possible outcome of the sale is still very much a grey area. However, David Willetts, minister of state for universities, did point out that “the private sector was best placed to collect the outstanding debt, allowing the Student Loans Company to concentrate on administering newer loans rather than having to chase up old debt”.
And while the government promises that it won’t renege on the deal students’ signed up to at the time of taking out the loan, a key aspect of the student loans system is that loans are with the government, rather than a private company.
This adds an element of security and reassurance that may be important to the debt averse. Routinely selling the loan book undermines this and could threaten participation from low-income students, which is currently at an all-time high according to UCAS.
Selling at a loss
A further, perhaps more immediate, concern is the likely loss that the government may make on the sale of the loan book. Many analysts have pointed out that any waves of future loan books that are auctioned off are unlikely to be sold for a profit. They point to the recent sale of the pre-1998 loan book, worth £890m and sold for £160m in November 2013. The large loss reflects the uncertainty in the real value of the book.
Valuing the student loan book is a highly complicated procedure. How much a debtor repays over the lifetime of their loan is dependent on whether they are working, and how much they earn. To calculate the value of the loan book it is necessary to predict future employment prospects and income streams of each of the graduates owing money.
This of course is heavily dependent on future economic conditions as well as the graduates’ own skills, motivation and luck. The uncertainty built into this debt makes it less valuable than other forms of debt, and increases the probability that it will be sold for a lower value than the money it would bring in over time if the government held on to it.
Sacrificing long-term income for short-term gain is bad economics and bad for taxpayers who ultimately must take the hit. More importantly, increasing the government subsidy on student loans in this way also goes against the ethos of the higher education finance system.
The argument for introducing – and increasing – tuition fees is simple. When students pay tuition fees they are paying for a service they directly benefit from in the form of increased wages. When the government pays, everyone pays – even those who don’t go to university and therefore don’t accrue any wage benefit. A system in which graduates contribute more than non-graduates is more progressive.
But any loss made on the loan book is an increase in the amount all taxpayers – including those who didn’t go to university – contribute to the higher education system. This makes it all the more regressive.