Comment: Taxpayers should heap scorn on the government’s loan book sell-off

Professor Sir Keith Burnett, Vice-Chancellor of the University of Sheffield, discusses the government's plan to sell-off the student loan book and says the deal deserves scrutiny it hasn't had so far.

Taxpayers should heap scorn on the government's loan book sell-off

by Professor Sir Keith Burnett, 3.1.17, published by Daily Telegraph

With a degree in one hand and an iPhone in the other, surely the world belongs to Britain’s university graduates. Only the truth is that things can be tougher for young people than their Instagram profiles suggest.

The statistics show that the fate of new graduate is less than handsome: more and more young people trying to make their way in London are living in shared accommodation for longer, paying a far greater proportion of their wages for a roof and their commute, and have jobs with much less security than their parents had. The dream of home ownership is receding fast.

Even when children come along, the bulk of income can still go on rent and childcare, for the first time leaving new parents with less household income than those who are retired and without dependents, according to the Office for National Statistics.

It is reasonable to get people to pay for the privilege of an advantageous education – British universities are among the best in the world – but they are paying too much.

Professor sir keith burnett

For graduates, the student loan has had the greatest impact on their outlook. Was it a good idea to take out this debt? It depends who you are. And I'm not just talking about whether you are a high- or medium-earning graduate. I'm thinking about the standard tax-payer too.

It may come as a surprise that the Loan Book of debts that these mostly young people incurred in their student years is one of the biggest 'assets' that the UK government has on its accounts. Whoever owns this book has many billions owing to them, just as a building society counts outstanding mortgages which it knows it can call on either through repayment or selling repossessed houses.

Just before Christmas, the government quietly announced plans to sell this 'asset' early in 2017. It really is an asset in accounting terms, particularly when you see the interest rates the government is imposing – far higher than Bank of England’s rates.

The sale is not good news for either students or the country.

It is not as straightforward a sale as you might imagine. Much of the money loaned will not be paid back, because graduates only pay according to how much they earn. As the number of graduates increases and the availability of high-wage jobs fails to keep pace, there are a good proportion who may never meet the repayment threshold.

You might say that this debt-to-wages caveat underpins a system that is fair in its own right, given the system was introduced to save the tax payer money as university education expanded and to make people accountable for the cost of their own tuition.

However, in order to make the sale a proper commercial proposition, the government now needs to sell the loan book for much less than it could were everyone earning enough to pay all the money back.

In effect the country will have to do what it did with some of the banks that had bad loans in 2008, before it sells those loans on to a private investor. A good deal for the government is one paid for by students.

It will also have to offset bad debt with funds we could otherwise use for other things, although the high interest rate also means the government needs to offset the bad loans at a lower rate. So a better deal for the government is again paid for by students.

Cynics might say this was the plan all along, to make financing student education an almost completely private matter despite the public spirit undergirding it. Worse still, there is no guarantee that the owners of the new system will be some benign UK benefactor. It is just as likely to be a hard-nosed pension fund or overseas investor with the intention to maximise returns.

The high interest rate will be enticing. An interest rate of up to 4.6 per cent which starts accruing even before they leave university proves shocking to many students and their families. To the student who has to pay 9 per cent of their income above £21K a year, this is a very big deal.

Yet this early debt and high loan costs are a UK phenomenon. In Germany, for example, tuition is free for German and all international students but entry standards are high. For former students in today's Britain, the German system is almost unimaginable. It is as if the standard rate of tax was hiked up by 9 per cent; for many, that will stop them doing some of the most important things they did at this stage in their lives.

It isn't just the young who are affected. Many simply have no idea such a shift is happening. And if we make a buck at their expense, extra private debt can act as a real drag on the economy’s growth rate. We cannot afford to encumber the young.

It is reasonable to get people to pay for the privilege of an advantageous education – British universities are among the best in the world – but they are paying too much. Graduates who are industrious enough to earn more than £21K – no small feat today – are paying more interest than the government would have to pay on a loan which is next to nothing.

Now, the tax payer is paying billions of pounds so that a commercial organisation gets the opportunity to be paid a commercial rate of interest on a loan, and we are selling off the loan at a commercial rate so that a commercial organisation can profit from our children.

The government can claim economic good sense. But on the long-term there has been increase in private debt that is an extra danger to the UK economy.