Sometimes developments flow naturally together and we see a clear example of this today. It was only yesterday that I pointed out that the Bank of England puts its telescope to its blind eye on the subject of student loans.
In addition students will be wondering why what are likely to appear large debt burdens to them are ignored for these purposes?
Excluding student debt, the aggregate household debt to income ratio is 18 percentage points below its 2008
peak.This is particularly material as we know that student debt has been growing quickly in the UK due to factors such as the rises in tuition fees.
Losses mount
I am often critical of the Financial Times but this time Thomas Hale deserves praise for this investigation.
The UK government is set to book a loss of almost £1bn from its largest privatisation of student loans, raising questions over the valuation of tens of billions of pounds of remaining graduate debt.
The most obvious question is why are we privatising these loans at a loss? It was of course the banking sector which saw privatisation of profits and socialisation of losses as fears will no doubt rise that this could be the other way around in terms of timing.
As we look at the detail the news gets even more troubling.
The controversial sale of a batch of student loans this week is expected to raise around £1.7bn, according to a Financial Times analysis of deal documentation. The loans, which had a face value of £3.7bn last year, are part of a total of £43bn in loans made to students up to 2012, which are currently on government books valued at just under £30bn, according to the Department of Education’s latest published accounts, as of the end of March this year.
As you can see not only are those loans not alone but they are being sold at a level below previous mark downs in value. The £3.7 billion face value had already been marked down to £2.5 billion and now we see this.
The deal will raise around £1.7bn in cash through the securitisation process, where assets are packaged together and sold off as bonds to investors. The process is a common feature of financing for student borrowing in the US but has rarely been used in the UK.
This seems odd as why would the UK taxpayer want to capitalise his/her losses?
The government’s loan book sale is dependent on passing a “value for money” test, which is designed to ensure that public assets are not sold too cheaply. The details of the test will not be made public but it is expected to provide a different, lower valuation for the loans compared to those on the DfE accounts.
The sale of the loans is part of a wider government effort to sell public assets “in a way that secures good value for money for taxpayers”, according to a statement on the student loans company website. The government aims to raise a total of £12bn through selling an unspecified amount of pre-2012 student loans over the next five years.
This brings us to a combination of Yes Prime Minister and George Orwell. Whilst it is possible that selling something at half its original value is sensible it needs to be checked carefully especially if it is public money . Also if it is a good deal for the new investors why not keep it?
What has happened to these loans?
Essentially these are loans from the previous decade which only have a rump left and guess which rump?
The transaction is made up of loans issued between 2002 and 2006, on which repayments are linked to income. Around half of students who borrowed during that period had already paid off their loans by the end of the 2015-16 financial year, meaning the pool of debt included in the deal is likely to be of a lower credit quality. Of those graduates with outstanding loans, only 60 per cent made a repayment in the same financial year.
So 40% of the remaining loans are seeing no repayments at present and the pricing here suggests that this will continue. One fear is that the buyers of the loans may try to pressurise students to repay even if they cannot afford to. Also there is the issue of what looks like around 20% of the students from over a decade ago still do not earn more than the £17,775 threshold ( confusingly more recent students seem to have a £21,000 threshold).
The rationale
Carly Simon poses the apposite question
Why?…. Don’t know why?
This is what it is all about. Yet again a wheeze for the national debt numbers.
Part of the motive for the sale is to reduce public debt. The cash generated from the transaction will go towards reducing public sector net debt, which was £1.79tn at the end of October. Unlike cash, student loan assets do not count towards the calculation of public sector net debt.
Comment
This is in my opinion a disaster on a national scale. Let me open with an issue which regular readers will be aware of but newer ones may not. This is the cost or interest on these loans and you may like to note that the most the UK would pay on issuing government debt is ~1.5%. From MoneySavingExpert (MSE ).
The rate used is the previous March’s RPI inflation rate. March 2017’s RPI inflation rate was 3.1% meaning interest charged on student loans for the 2017/18 academic year is between 3.1% and 6.1% depending on whether you’re studying or graduated, and how much you earn.
So at least double and maybe quadruple the alternative which speaks for itself. On this subject I both agree and disagree with MSE. He thinks for some it does not matter than much of this will never be repaid and is in that sense “free.” But you see along the way it matters as there is not only the psychological effect of say a £50k debt but it is also it affects mortgage calculations now. Recently reports have arisen of younger people not joining the NHS pension scheme and I wonder if that is linked to the fact that nurses now have student debts and feel burdened.
Back on the first of August 2016 I explained the problem like this.
We move onto the next problem which is that ever more of this debt will never be repaid which poses the question of what is the point of it? It feels ever more like a rentier society where someone collects all the interest and the takes the loan capital but we then forget that. Another type of borrowing from the future.
It would be much simpler I think to abandon the whole system and go back to providing tuition fees and grants. Also as this reply to the FT from safeside implies perhaps some of the weaker universities should be trimmed.
It would be interesting to see which universities produce graduates who are sub inv grade
It is tempting to suggest we should also write the whole lot off as let’s face it we are writing most of it off along the way anyway. The only major issue I think is how to treat fairly those who have already repaid their loans either in part or in full. It would also end the shambolic way the loans are collected. We seem to have replaced a system which worked with one based on more than few fantasies and if we continue to follow the American way then as I pointed out in August 2016 students can presumable expect this.
It’s 9 p.m. and your phone chimes. You’re among the one in eight Americans carrying a student loan—debts that collectively total nearly $1.4 trillion—and you’ve started to fall behind on your payments.
You know the drill: round-the-clock robocalls demanding immediate payment. You wince and pick up.
Notayesmanseconomics's Blog 
Shaun,what a shockking manipulation of the young. It seems that the boomers beliver that all whom follow must subsidize their existence. A rentier charge to every younger member in society. It is a literally a case of the old cannibalizing the young, wrote large here: https://renegadeinc.com/student-debt-rise-sugar-daddy/
I suggest a moral equivalence or mathematical link between the bank base rate and the interest charged on student loans rather than the 5% uplpift we see today.
Paul
I’d be grateful if you’d please explain how student debt is the old manipulating the young.
In the olden days, academically gifted were funded by the state into higher education. They paid little if any extra bunce to attend University, perhaps their parents gave some maintenance. The view was that the nation needed gifted and further educated people to succeed a nation and the taxpayer footed the bill for University blue sky research and indeed students at large.
The taxpayer was expecting higher tax take from the successful young.
Today, the youth are pressured to take the debt, they are told, no one can get a decent job without a degree. Everyone has to get one at the going rate, £30K, £50K or indeed more. If you fail in life, don’t worry you don’t need to pay it back, it will just hang over any inkling of success.
This is a manipulation of today’s young people, whereas in the past this circumstance was impossible.
But it’s crap, isn’t it? Since so many are doing degrees whereby it should be obvious, from the title of the degree alone, that they are wasting their time and money, and that there are many going after few, if any, well-paid jobs, how dim do you have to be to fall into this trap?
Too dim to go to uni? So dim that you believe you should?
It may be a manipulation, the way you put it, but the old, “cannibalising” the young? Nonsense.
Blame Tony Blair, he started the mantra that 50% of the young should go to University. To avoid paying for it, he invented student loans.
Bit like PFI really.
Student loans have morphed into a form of corporate welfare it’s nothing short of obscene. Debt is being used as a form of coercion on the young and may I highly commend the link that Paul has supplied to Renegade Inc. I think we should take the advice of Orange Juice, rip it up and start again.
Hi bill40
I am not normally a fan of abandoning debt ( as for example how do we deal with those who have repaid in part or full?). But this whole situation is such a shambles that it only seems to exist for some to take fees and salaries on the way. So as you say put Edwyn Collins on the hi-fi.
Let’s get to the real purpose of all this mess.
Student loans and the universality of university, is just a way to gerrymander the school-leaving age to 23, to avoid the bad headlines of 50% youth unemployment, whilst, like PFI, keeping the cost off the govt’s books.
It was never meant to be reclaimed by those duped into worthless degrees, as they, unless very lucky, were deemed too dim to ever reach repayment-threshold salaries.
The scandal is the govt. debt which will eventually have to be repaid, as it is written off, by taxpayers in general.
If the govt. can sell it at 50%, we’re getting a bargain, as it was thought that 70% would be written off.
It’s nothing to do with generational antagonisms; the old don’t benefit, it’s just the young who suffer.
While we are at it, we could also return to the system we had before Tony Blair decided that if you could fog a mirror you should qualify to go to university. Degrees for everyone!!!.
The problem is, if everyone has a degree, they aren’t worth very much are they?
Blair sold this scheme as removing the non existent class barrriers, so that a degree was open to everyone regardless of their background(which always was the case anyway) but in reality the only barriers were academic ability, and the bar was set by A level results.
However, due to the devaluation of A levels, everyone that wants to go can go, since everyone could now pass A levels, and A grades were the norm.
And so we have a situation now where almost 40% of students now go to university and borrow up to £50,000 in the process, and then graduate with a worthless piece of paper that entitles them to a job paying less than someone without a degree.Labour, having created this problem, will I expect offer the solution to the young electorate at the next election by offering to write off student debt and offer free university education to all.
You would think by now, the penny would have dropped?
Yes that was one of ( only one of many ) stupid populist moves by Blair that have come back to haunt us.
You might also note that the competition between universities has resulted in an extraordinary grade inflation, hardly ever commented on in the press. If you are going to charge £9k a year, the students want a first class degree. When I was at university a long time ago, about 8-10% of students managed to get a first. I now see that many universities are awarding 30% firsts and, in one case, over 40% of students get a first.
Prizes for all.
I have two children who are at or finished university and find the levels of debt without the generosity of the bank of mum and dad to be absurd. In fact, some students think that, since they are already £50k in debt, what is another £10k?
I am afraid that the net result of writing off debt, however, will be that even more people will go to study useless degrees.
I would like to go down the Singapore route, which is to charge high fees, but write off 20% a year following university so long as the student goes into full-time work paying Singapore taxes.
If you don’t send 18-25s to universities, even to no purpose, and do away with retirement ages, you end up with Portuguese/Greek levels of youth unemployment, & those stupid enough to go to university in an attempt to mask their level of ability by obtaining a degree in media studies, rather than go directly into shop/warehouse work, quite frankly, deserve to be mugged.
Guess what, getting a degree doesn’t alter the amount of jobs available so doesn’t influence unemployment rates, sending such large numbers to university only guarantees lower wages and prospects for those graduating, additionally employers have the nightmare of deciding who the best candidate for a job requiring A levels, now cannot differentiate as they all have A grades, but obviously some are a lot better than others, so why bother?
Solution?: Just specify a degree as the minimum requirement for a position that thirty years ago would not have required any qualifications, and the bonus is you don’t have to pay any more!
It does distort YOUTH unemployment rates.
Just specify a degree as the minimum requirement for a position that thirty years ago would not have required any qualifications, and the bonus is you don’t have to pay any more!
________________________
But the candidates are no better, just four years older, and, because of the NMW, that means that you get candidates, with absolutely no work experience in their 20s rather than at 17, so you DO have to pay more; £3 per hour more.
Shaun,
Perhaps students could repay their education by voluntary work in the community is this too crazy?
Hi Chris
Not at all as it would add a lot of sense to the system. Another way I was thinking of was for nurses. We now load them with student debt well how about we write a percentage off for each year they work for the NHS?
I am utterly disgusted by this whole farago. It is as you say, ridiculous to make individuals pay 3% ABOVE RPI, when the government can borrow on our behalf at very much cheaper rates. My daughter and her boyfriend were unlucky enough to be the first to taste the new, higher/higher rate student loans. They left university as a young couple with over £100k in debts between them. Whilst in theory the amount repaid is sort of ‘capped’ at 9% above a threshold, the legislation provides for changes they may wish to make at any time to the loan terms. More concerning then is the loan profile at different rates and repayment schedules. Have a play with this very useful Student Loan Calculator: https://www.student-loan-calculator.co.uk/
As you say, very, very depressing for our young as the debt compounds quickly to becoming unpayable. And the size of the compounded future debt that will need to be written off is frightening from a society point of view. In fact a simple spreadsheet should allow for calculating when the UK officially goes bust! And if you wanted just one reason for Brexit, it is that EU students have equal access to these loans and their repayment of them are extremely low.
Trouble is, access to even basic jobs requires a degree now and many public sector ‘professions’ seek to get higher pay and respect by making it a requirement – I am looking at nurses here and lately the police have mooted it! It is a gun held to every young person’s head more or less. There is almost no choice about not going to Uni. If we are to keep an element of student loan (I used to believe it would help purchasing of courses, but I’m sadly disillusioned that it does anything of the sort), then the education establishment themselves should bear the risk of their loans not being repaid. That would sharpen a few minds and perhaps improve the allocation of scarce educational capital.
And if that social engineering is reversed, business will get used to that too.
It would be interesting if the government gave some statistics on the non paying loans as in what course and university. It might make students think twice about some courses and realise that a number of universities just see them as canon fodder to pay themselves high salaries (looking at you Bath).
The situation in Bath is outrageous and the woman in question doesn’t seem to realise that her pay and generous paid-for property in one of the best houses in Bath plus writing off a car-loan and other benefits is just way beyond what is reasonable however good she thinks she is at her job. I wonder why it’s taken the students in Bath to get really angry about it.
Another point has just struck me: university students support the housing market, as they tend to study away from home, so need to rent.
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The cynic in me just sees this as bringing forward taxation to be spent now keeping many cities and towns going that would just have sunk withou trace. The likes of Sheffield, Wolverhampton, Liverpool, Stoke, Lincoln etc. would be much poorer without their multiple universites, converted polys/teaching colleges snd University Hospitals.
Degrees have been devalued. There are nowhere near the amount of real old money graduate jobs to meet demand. It is a massive confidence trick to boost the economy/GDP by personal debt.
The fact that the greater proportion will be written off makes the whole process laughable and obscene as is the interest applied.
Many jobs simply don’t require a degree. Training, development could be obtained in work.
A form of graduate tax against all taxable earnings would be a fairer way to recover. It need not be a flat ratr but incremental based on income like current income tax.
Hi Yogibear and welcome to my corner of the web.
It would appear that the universities are not pulling their weight either. I came across a friend’s son earlier and asked if he had broken up for Xmas.?Oh yes he replied.on my university course the last lecture this year was on November 30th…