“Cash now” behind loan sell-off

Submitted by Matthew on 22 April, 2015 - 10:21 Author: Gemma Short

In July 2014 Vince Cable, the Lib-Dem Secretary of State for Business, Innovation and Skills, cancelled plans to sell the remainder of the higher education student loan book to the private sector.

Why then did Osborne, in December 2014, say that “progress continues” on the planned sale and why are the projected £12 billion gross proceeds still included in fiscal projections?

The answer, has more to do with pre-election jockeying over promises to lower national debt than with student funding. Due to the significant shortfall between annual outlay on new loans and repayment on old ones, the government has to borrow to create new loans, adding to national debt. The sale of such an “asset” as the student loans book to gain “cash now” rather than wait for longer term repayments is appealing to any government wanting a quick fix to “balance the budget”.

In 2010 total student loan debt (from the old system of £3000 fees with loans repaid at rates depending on gradute income, and from pre-tuition fee loans, with fixed repayment schedules) was about £30 billion. This reached £54.4 billion in March 2014, and due to £9000 fees is set to increase rapidly.

Loan repayments are not expected to reach significant levels until the 2030s (as student loans have a long life and repayments are weighted towards the end of their life). It is expected the total debt will peak in the 2040s at somewhere around £330 billion in today's money.

Loan book sell offs have been used by the government before. In the late 1990s the Labour Government sold a set of the pre-tuition fees mortgage-style loans for £2 billion. The terms of that sale, with the government agreeing to compensate purchasers if greater numbers of students failed to repay than predicted, mean the government is £240 million worse off today than if it hadn’t sold.

Because of the delayed replayment and low interest rates on student loans, their value to private speculators is considered low. As activists in the NCAFC pointed out in 2011, when plans for a sale were leaked from David Willetts’ education White Paper, the government would either have to make a deal including compensation if fewer students than predicted made repayments, or impose an increase in the interest rate on loans — in reality a retrospective increase in tuition fees for the graduates repaying their loans. The IFS estimates that three-quarters of borrowers will not repay all of their loan.

The “cash now” from selling the student loan book at an “attractive price” to the private sector will represent a loss to the government over a longer term.

Yet as parties scramble to be the most “fiscally responsible” with the most “balanced” budget they may well opt for “cash now”.

Add new comment

This website uses cookies, you can find out more and set your preferences here.
By continuing to use this website, you agree to our Privacy Policy and Terms & Conditions.