Following our recent teach-in at the House of Commons on the sale of student loans, Red Pepper and higher education expert Andrew McGettigan have produced an A4 double-sided briefing on the student loans sell off. The briefing provides an overview of past, current and future student loans sales, the figures and financial engineering behind them and their consequences.
To view and download a pdf of ‘The student loans sell off’ click here. To order print copies contact email@example.com
The government is going ahead with the sale of a first tranche of student loans. In December it announced that the first loans to be sold will be those issued to students who began their studies after 1998 – known as ‘income-contingent repayment loans’.
The programme of sales will begin in 2015 and range over five years, starting with the remaining balances of those who graduated in 2001, 2002 and 2003. But what is the real significance of these proposals, when it appears likely that a sale could make a long-run loss for the government?
A quick debt fix? Or a fundamental transformation of higher education?
The question nobody really gives a straightforward answer to is: why is the government trying to do this? At first glance the sale of student loans looks like an attempt to reduce public sector debt. But overall financial health and wealth is not improved by selling an asset at a long-term loss, even if it does boost the headline statistics in the short-term.
The sale of student loans issued between 1998 and 2012 would raise an estimated £10-12 billion – yet in 2018/19 alone, £17 billion of new loans are going to be issued. In other words, just one year’s issue of new loans in the future will put this sale programme in the shade. Indeed, the 2011 white paper on higher education reform, Students at the Heart of the System, specifically rejected the idea of this kind of ‘retrospective’ sale and instead pledged to aim for ongoing sales of the new loans associated with £9,000 fees.
The end goal is still to sell these new, much larger and much more complicated post-2012 loans (graduates will leave with £40,000 of debt on average). The retrospective sale of already existing loan accounts, then, is about setting a precedent. If the current sale goes through then it will be much easier to evade the political problems of selling the much larger loans.
Previous sales have made a loss
In 1998 and 1999, two tranches of the old fixed period repayment student loans were sold to the private sector. These ‘mortgage-style’ loans had been issued to those starting their studies between 1990 and 1997.
Each tranche was worth £1 billion (face value) and the government received roughly that amount as a price. The deal was structured so that ongoing contractually determined subsidy payments compensated the purchaser for the inability to change terms on the loans, the relatively high repayment threshold and the low interest rate, which was set one percentage point lower than the RPI measure of inflation.
In return for the upfront cash, the Labour government of the day was prepared to take a long-term loss on the deal. They had anticipated losses in the region of £135 million in 2000 prices by the time the deals ended in 2028. As of 2013, however, the losses on these sales stood at £250 million in today’s money (circa £170 million in 1999), over and above the cost of keeping the loans on the government’s books.
Will such considerations be repeated with the current proposals? What level of loss would be tolerable to effect a sale that is planned to raise £10-12 billion?
Taking a hit to make the loans palatable to purchasers
Potential purchasers will balk at the current interest rate terms enjoyed by borrowers. Interest each year is set at the lower of (i) bank base rates + one percentage point or (ii) inflation as measured by RPI. Bank base rates have been 0.5 per cent since 2009, making the current loan interest rate 1.5 per cent – not a very attractive rate of return for whoever buys them.
A rise in the interest rates for existing borrowers is not likely: it would require primary legislation to change the terms on loans issued to those starting before 2012. Such retrospective changes for existing borrowers would be controversial in themselves; to attempt to implement them in order to effect a sale much worse. Given that there is little Liberal Democrat appetite for anything to do with student loans, it is very hard to see how this current government could contemplate this avenue.
The answer to this conundrum is apparently the ‘synthetic hedge’, which was discussed publicly for the first time by anyone from the government when universities minister David Willetts appeared before a select committee on 14 January. Effectively, the synthetic hedge represents a government commitment to compensate the purchaser after the sale by making payments if the interest rate is below inflation.
One reason the post-2012 loans are more difficult to sell is that their complexity and size requires an even higher degree of financial engineering – such as the kind of tranching structures seen in collateralised debt obligations (the financial ‘packages’ that became infamous for their role in the banking crisis), or segmenting the loan book by borrower ‘characteristics’.
The Rothschild review says quite clearly that the solution to the above problem is to somehow get universities to buy their own graduates’ debt. This is not going to be to the forefront of the discussion about the current sale, but it will be central to the eventual sale of the post-2012 loans. Obviously questions about the relationship between students and institutions are transformed if those institutions are the purchasers of their students’ debts.
We need more than a financial technocratic trick for higher education
Yes, universities need financing, but if the debate about higher education policy is reduced to the value for money of the student loan sale then something has gone drastically wrong.
Ultimately, the whole purpose of these higher education reforms is to create a new kind of stratified market in the university sector. Fees and loans are the essential mechanisms that drive a consumer system.
The answer is not simply to come up with a different financial technocratic trick – in fact, that motivation seems to be the problem from the offset.
Thanks to Goldsmiths UCU for its support.