Debate | Should the student loan book be sold?
After the privatisation of pre-1998 student debt last November the Chancellor, George Osborne, announced that the pre-2012 student loan book would also be up for sale to private companies, with plans of completing this sale by 2015. Although this move does help to reduce public sector debt, it also means that all the interest repayments on loans taken from the Student Loans Company (SLC) would profit private corporations rather than the government. LS Debate asks, should the Student Loan Book be privatised?
Andrew Mitchell MP and Harriet Baldwin MP
For this side of the response to this debate LS asked the Government to outline its justification for the sale of student loans. I wrote to my MP, Andrew Mitchell (Conservative MP for Sutton Coldfield), and regular LS Debate contributor Andrew Campbell, wrote to his MP, Harriet Baldwin (Conservative MP for West Worcestershire), requesting their views on the privatisation of student debt. LS had hoped to publish these letters to form this side of the argument however copyright laws restrict us from reproducing these letters without permission from the MPs themselves, which, in both cases, had not been granted at the time of going to print. What follows is an outline of the argument in each letter.
Alex Roadnight, Debate Editor
between 1990 and 1998. This debt has already been privatised through what Baldwin describes as a “competitive bidding process” that was won by Erudio Student Loans Ltd and a consortium composed of CarVal Investors and Arrow Global Ltd for £160m. Baldwin argues that this price reflects the fact that it is an old portfolio whose value is deteriorating. She goes on to state that the consortium purchased the loan book for more than its estimated worth which, in financial terms, makes it a profitable and worthwhile sale for the Government.
According to Baldwin, the consortium responsible for purchasing this pre-1998 loan book have experience of “managing consumer debt” and a history of “treating customers fairly”. Indeed, both Harriet Baldwin and Andrew Mitchell are adamant that any buyers will not have the power to change the terms and conditions on which sold loans are taken up and the administration of loan repayments will remain the responsibility of HRMC and the Student Loans Company. This is the case for the pre-1998 loan book sale, which has already been sold and the planned pre-2012 loan book sale.
MP Andrew Mitchell’s letter focuses on the pre-2012 student loan book that will be sold over a number of years, starting in 2015. He clearly states that the sale has to meet set requirements of predetermined criteria that include getting value for money and making sure that there is no adverse affect on the borrowers whose loans are sold.
Ultimately, both letters indicate that the decision to privatise Student debt has been made as the amount the Student Loans Company (SLC) has been collecting from the portfolio has been reducing year-on-year and the private sector is “better placed to maximise returns”. In this, the sale of these loans is in line with the wider economic strategy to reduce public sector net debt. The resounding belief throughout both responses was that the sale of the student loan book represents good value for money from the taxpayer.
For an alternative response, why not email your own MP requesting their view on the matter?
Fourth Year Environment Science
The government’s justifications for its plans to privatise the student loan book have been predominantly economic. The sale of the pre-2012 book is part of a bid to reduce public sector debt and balance the Treasury’s books as part of a wider austerity plan to sell £15m of public assets by 2015.
The Chancellor of the Exchequer suggested that the sale of the student loan book will raise £12 billion, contributing significantly towards the £15 billion target. However, these justifications have proven to be fundamentally flawed. Even Rothschilds Bank, the government’s financial advisor in 2011, conducted an economic analysis of the viability of the sale and found that it would most likely only raise £2bn, leaving a discrepancy of £10bn in the government’s calculations.
Such concerns regarding the Government’s economic justifications have been further compounded by the sale of the pre-1998 loan book last November. The pre-1998 book, worth £890 million, was sold for only a third of its face value – £160 million. Criticism of this obvious undervaluation echoes those launched at the recent privatisation of the Royal Mail where current shares are trading 70 per cent above their original sale price. Critically, the government demonstrate a distinct inability to maximise profits from sales of private assets, a strategy that is, in itself, questionable.
Not only does the sale of the student loan book represent economic nonsense in terms of the initial gain received from the sale, but it will also result in a greater burden for the taxpayer. For instance, the Rothschilds’ report recommended that the bank provide financial “sweeteners” to attract private buyers, thus supposedly increasing the profitability of the student loan book.
Proposed financial sweeteners include a ‘synthetic hedge’ where the taxpayer would act as guarantor on these loans to compensate for potentially low interest rates. In this, the taxpayer will subsidise the profit margins of private companies from government debt. It appears that the consequences of selling the student loan book will either cripple students with ever-increasing lifelong debt or punish taxpayers by forcing them to provide the shortfall for private companies.
Finally, it is important to consider the principle behind the sale of the student loan. University education is a public asset and the idea that profits from interest repayments on my loan will be lining the pockets of private companies, rather than being reinvested into the public sector, is detestable. The fact that this decision can be made without my initial consent or consultation is abhorrent to me. The evident short-sightedness of reducing public debt and balancing the books presents a clear strategic political move for the upcoming 2015 election. At the expense of reaping future income from graduate interest repayments, and further commercialising the higher education sector, the government has prioritised short-term budgetary benefits that do little to support the public sector, the taxpayer and students.