Loans For Sale
On Monday the Government announced plans to sell student loans to private investors. The deal will involve around 4 billion pounds’ worth of loans from almost half a million students whose repayments began between 2002 – 2006. In an effort to cut national debt, the government will sell the loans through securitisation – ‘the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security’ (Investopedia.com): where debt will be sold as bonds to investors.
According to The Financial Times the proposed sale of the loans will not affect the terms or the administration of the income-contingent loans that currently stand, with the government insisting that former students who fall into this bracket will be not be affected as strict controls will be in place. David Gauke, Chief Secretary to the Treasury believes the sale “will play an important contribution in our work to repair the public finances”.
However, this type of loan is riskier than other forms of private sector debt; the current loan repayment system for students in this threshold means they begin paying back their debt once earning over £17,495, and subsequently stop if income falls below this; the repayment of debt is currently 9% of any earning above this level and moves with the Retail Price Index.
Although the sale will not affect the current terms of the administration of these income-contingent loans, it has raised questions for the impacts of future changes on the loans. The sale involves set regulations, meaning that to change the terms would be a violation of a contract, leaving future governments unable to modify these terms.
Many are opposed to the selling, including Sorana Vieru, Vice-President for higher education at the National Union of Students(NUS) , who believes that ministers are “pulling an ugly move on students”. Adding that selling to private investors will lead to temptation “for governments to subject future students to extortionate interest, commercial terms and conditions and the raising of the repayment threshold”.
These recent changes to the ownership of student loan led to the questioning of what do students really know about their own debt?
In a survey conducted this week current University students were asked general questions about student loans, including questions about the recent privatisation plans. We found that 76.92% of students were not aware that the Government is selling the loans of those who started repayment between 2002-2006 to private investors. When asked “How aware are you of the current payback system for student loans?”, only 15% said they were completely aware, with a further 69% saying they only understood certain aspects of it. Many also had no idea about interest rates regarding student debt or the changing Retail Price Index.
It is clear that many students are actually quite unsure about the reality of University debt that follows us once we graduate. Whether it’s because many choose to ignore the debt that is quietly piling onto our shoulders or perhaps students have actually not been made aware of interest rates, inflation and payment plans. These recent changes could lead to further implications to the repayment of debt in the future, and whilst some may prefer to remain blissfully unaware until graduation, for those concerned, here is a simple breakdown:
Plan 2 is for English and Welsh students who started on or after 1 September 2012. You start repaying when you earn over £21,000.
Data source: http://www.slc.co.uk/services/interest-rates.aspx
By Jess Jones
(Photo from FrontPagemag.com)