Fake plastic trees: selling off student loans is economic illiteracy

Monday 12-12-2016 - 17:10

At the end of the 2015/16 financial year, total income-contingent student loan debt in England alone stood at £76.3bn. In the next year or two, it will exceed £100bn, and it will continue to increase for many years yet.

From an accounting point of view, this debt pile (the student loan “book”) is a national asset, as it is money owed to the state – although the state has, in turn, borrowed money in order to pay the loans in the first place.

For at least six years, the government in Westminster has stated it intends to sell off a part of this national asset, most recently in the autumn statement last month. And, for just as long, no such sale has taken place (although the remaining mortgage-style loans given to students who started before 1998 were sold in 2014). However, the rumours reaching NUS are that the situation for income-contingent loans is about to change and the first tranche of loans will be sold off in the coming months.

This may yet prove to be only a rumour. Even so, it seems a good time to remind everyone why this is such an awful policy, and what we can do about it.

Why would the government sell off loans? In short, to raise some money at a time when there’s a high national deficit. Of course, they could raise money by increasing taxes on the rich, or on corporations – but that isn’t their style. From a Treasury point of view, you can argue there are other benefits: in principle, it also reduces the national debt and reduces the risk to the public purse, because if you sell off the loan, and it turns out repayment is lower than forecast, the buyer is the one to lose out. Money now and less risk – what’s not to like, right?

Except, unsurprisingly, it doesn’t quite work like that.

In order to find a buyer for student loans, the government has to sell them for far lower than the face value. In part, this is because the government expects to lose money on the loans, because a certain proportion will never be repaid, either because earnings are too low or people die. The big investment companies that buy the loans want to make a profit – to receive more, in the end, in repayments, than they pay upfront – so will have a very conservative estimate of the likely repayment levels and will then want a profit margin built in.

Worse still, when it explored sales, the government found that, because of the inherent uncertainty around student loan repayment, investors were uninterested in taking on the debt unless the government took on the risk themselves through something called a “synthetic hedge”. Sadly, this is not a fake plastic tree, but a guarantee that if repayments fall below a certain level, the government makes up the difference.

In other words, the government can get some money now, but far less than it would get in the long run, and only if it takes on the risks and coughs up more money in the future if investors don’t make enough profit.

Not for nothing did Martin Wolf, economist at the Financial Times and by no means a left-winger, call the policy “economic illiteracy”.

And that’s even before we get to the moral outrage of private companies making such enormous profits from student debt, or a policy which means some rich people avoid tax rises today by making us all poorer in the future.

If this wasn’t all outrageous enough, the impact on future graduates could be even worse. The decision to freeze the student loan repayment threshold – fiercely opposed by NUS and others last year – was in no small part down to a desire by the Treasury to ensure that loans were more attractive to potential buyers. While the terms of a sale would almost certainly mean a private company couldn’t change the terms and conditions of the loans they buy, it is far more likely that this or a future government will make terms and conditions on all loans worse in order to keep them profitable – perhaps by extending the 30-year term of the loans, or increasing the interest rate.

So what can we do? NUS will engage with campaigns against privatisation like We Own It, as well as with trade unions and opposition parties who oppose the sale, to raise the issue in Parliament and on the streets. It’s possible the buyers of loans will be pension funds looking for regular, inflation-proof income, in which case student loans become a new frontier in the divestment campaigns already being run by NUS and so many students’ unions. Most importantly, we need to get the public angry about this, because too many people don’t have any idea this is about to happen, never mind what it means.

The government wants to sell our education on the cheap, and privatise it through the backdoor. I don’t believe the public supports that in any way. If we can get them to articulate that opposition, we can stop loans being sold off.


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