Getting the Books Straight: 6 Things You Should Know About Student Loans
by Craig McVegas
24 March 2014
Student loans are back in the news this week. The BBC is reporting that it’s anticipated that 45% of graduates will not be able to pay back their student loans, putting the government out of pocket. This is a gross simplification (or misrepresentation) of what’s happening, but the picture is still dire in terms of public finances. Many student-led campaign groups are now trying to organize around student loans, and in particular the ongoing sale of the student loan book. This is a necessary but difficult task: multiple factors are at play simultaneously and sloganeering around a dense set of policy alterations and accountancy jargon is rather more difficult than campaigning against HE cuts. Here are six things we should be clear on:
1. Interest rates are not going up.
Student groups such as the National Campaign Against Fees and Cuts and the Student Assembly Against Austerity have been way behind on this one. Last summer there were legitimate fears that once the loan book was sold, interest rates would go up retrospectively. These fears were perfectly warranted at the time. Firstly, there is a clause in student loan contracts which would facilitate such a move. Secondly, it was on the table as one of the options to make the (otherwise frankly unappealing) loan book offer more attractive to potential buyers. However, that was last summer and things have changed. The most recent portion of the loan book to be sold was done so on the provision that interest rates must remain fixed, and there is now no indication that this is the plan for future sales. This is inconvenient for ease of politicking, but we don’t do ourselves any favours by propagating unsubstantiated rhetoric. If we want to talk interest rates, let’s talk about how we managed to miss the hike in repayment rates that came into effect in time for those taking out £9000 fees. Whoops.
2. Every student activist should know what a ‘synthetic hedge’ is.
Instead of going down the route of raising interest rates, David Willetts confirmed that the government will create a ‘synthetic hedge’ to protect the profits of whoever buys up the loan book. Essentially this means the amount privateers might have accrued from raising interest rates retrospectively will instead be covered by the treasury. It’s a clever move by Willetts. With the ‘interest rates’ route looking incendiary, he’s been able to make the sale more politically savoury while assuring a sale through synthetically protecting the profit margins of the buyers through the public purse. A sigh of relief for individual students perhaps, but bad news for public finances. For a short-term cash gain, over time public money will be bleeding into private hands.
3. The loan book is a bargain bucket.
The student loan book was massively discounted for a quick sale, in addition to the creation of the synthetic hedge. This was done to make the debt more appealing to buyers. While private debt owners are likely to be less empathetic with their debtors in seeking repayments, they couldn’t ignore the fact that many of the debts will simply be wiped off after 30 years, reaping relatively slim profits especially considering the fixing of the interest rates. Therefore both the synthetic hedge and the discount acted (and are acting – the book hasn’t been completely sold off yet, remember) to make the deal more attractive. What sort of discount are we talking? Well, at the end of last year £900m worth of debt was sold for just £160m. So why is the government so keen to be rid of its assets? Within the scope of this government, Chief Secretary to the Treasury Danny Alexander has announced his intention to shift around £10bn of public assets. But think bigger: Royal Mail was part of the same plan last year, as was North Sea oil, National Rail and the steel industry in the 80s and 90s. The coalition is trying to flog the very last of the family china to raise cash quick so they can claim to have fixed the deficit. At best this is myopic; at worst, destructive for generations. The crisis is here to stay.
4. The doctor will see you now…
This one’s straightforward. The 2008 Sale of Student Loans Act means that future loan book sales can go directly through Business Secretary Dr Vince Cable. No consultation, no democratic oversight, and no need to take it through parliament.
5. Cash flow: ‘problem’ is an understatement.
So the latest news is that the RAB charge has been estimated at 45%, which is 5% up on six months ago. What the fuck does that mean then? The Reserve Accounting and Budgeting charge is the estimated loss on returns from loans calculated over 30 years, including inflation. So you might lend a tenner today and estimate you’ll get £8 back in 30 years, but then you also need to consider that £8 in today’s money isn’t worth the same in 30 years. In 2044 money it might be worth, say, £6. From £10 initially, you’re now expecting what amounts to £6 back. To account for this loss, the RAB charge you would set is 40% (i.e. £4). Basically, this means the government has to admit that increasingly less money given out through student loans is going to be coming back. This isn’t straightforwardly about fewer people paying money back, but also about graduates not earning as much later in life as is typically billed. Additionally, remember that after 30 years the debt is written off, and therefore the cash flow stops. Andrew McGettigan is excellent on elucidating this issue, so check out his blog.
6. Student loans come from somewhere.
This is a fairly obvious one but it’s easy to forget given all the developments in HE policy over the past four years. When the cap on tuition fees was raised to £9000, the outlay needed to fund the increase in student loans was calculated based upon universities charging an average of £7000 per year. Of course, most universities jumped straight to £9000 both to send signals of prestige to applicants and to try to make up the arts and humanities block grant deficit blown open by funding cuts. This left the average year’s tuition fees significantly higher than anticipated, meaning Willetts didn’t have the funds for the outlay for his own plan to alleviate the deficit… causing yet more national debt. Someone get that man a calculator.