A previously unseen report, commissioned from the Rothschild Bank on behalf of the government, reveals plans to sell off student loans taken out since 1998 and retrospectively raise the interest rates paid by graduates to increase the attractiveness of the loan book to private buyers. This could leave 3.6m graduates facing sharp rises in their student loans repayments, while the tax payer stands as guarantor in the event students default on the debt, paying up to ensure the private investors never lose a penny.
First Came the Fees
Previously, tuition fees were capped at £3,000 a year. One of the first acts of the Coalition government was so introduce a new ceiling of £9,000 a year (despite Liberal Democrat pledge to scrap tuition fees altogether) – trebling the potential fees payable by students.
It’s hard to believe that a little over a decade ago, we viewed higher education as a social service. We clubbed together to put our young people through university, as an investment in their (and our) future. However, as manufacturing and many non-graduate jobs moved offshore to allow corporations to maximise profits from poor labour conditions abroad, a pending jobs crisis was foreseen. This was the ‘changing economy and jobs landscape’ Tony Blair was talking about in 1999 which called for his target of 50% of young people attending University. His aim was to put more young people through University and create new graduate jobs for these young people to migrate to. The populous were told that in order to fund this expansion in student numbers, tuition fees were required to spread the burden.
So, the story is that in order for more young people to go to University, fees are required. A quick look at the facts proves this argument invalid on several grounds.
Firstly, the UK is not a leader of developed nations in terms of the percentage of its population receiving a University education. In fact, between 2000 and 2008 (after tuition fees were introduced), the UK fell from third to fifteenth in graduate numbers, according to OECD figures.
Secondly, several nations above the UK in this league table have not introduced tuition fees. In Finland, which tops the league, 80% of young women attend University and there are no tuition fees. Denmark, Sweden and Norway all outrank the UK and none have introduced tuition fees.
So, introducing tuition fees did not increase the UK student population any faster than the rest of the OECD – in fact, it has risen more slowly than elsewhere. Neither does a rising student population require the cost of education to be transferred to the student by way of tuition fees.
Furthermore, that 50% target was never reached. Only this year does it look like the UK might creep up to 49%.
Then Came the Loans
Before 1998, student loans were payable over 60 monthly instalments, paid at the rate of inflation and the debt was cancelled when the graduate reached 50 years old. Between 1998 and 2012, student loans were based on income as a graduate. A graduate would pay 9% of their annual income each year once earning more than £15, 795 a year. At the moment, interest rates are capped on these loans – Graduates pay interest at either the RPI measure of inflation or banks’ base rate plus 1%, whichever is lower. Since 2012 it has risen to RPI plus 3%.
The privatisation report states that this low interest rate will be unattractive to private investors and so should be scrapped in favour of higher rates, never mind the impact on the graduates, who took out these loans under the current interest agreement. According to the Guardian report:
“Removing the cap would, however, burden graduates with years of extra repayments, lasting in some cases until the end of their working lives. At the moment, the cap on student debt taken out before 2012 keeps repayment rates at 1.5%. Lifting it would mean a rate of 3.6%, in line with RPI in March 2012. One indicative calculation suggests that an employee on £25,000 a year, with £25,000 of undergraduate loans taken out before 2012, could work until retirement without ever paying off their debt if the interest rate cap were removed.”
The Rothschild report goes further though. It also suggests creating a ‘synthetic hedge’ whereby the government pledges to underwrite all risk associated with the student debt – meaning that in the case of default, the tax payer covers the investor’s potential losses.
Some have argued that since the paper was prepared in 2011, that this is old news or unlikely to become policy. Yet earlier this year, the government revealed plans to auction of the student loans between 1990 and 1998, for a face value of £900m (but are likely to receive just a fraction of this figure). The post 1998 loan book is worth far more than this, at £40bn.
Furthermore, the government is eager to plug an ever growing hole in higher education funding.
The Coalition and Higher Education
Back in 1999, on the introduction of fees, the funding agreement for Higher education was £4.2bn. If spending had been maintained in line with inflation (which would translate into a cut in funding per student given the increased numbers), this figure would stand at £6.1bn today. However, funding for higher education 2012/13 was cut by £1.2bn, down to just £5.2bn. More students, less funding.
The 2012 student loan agreement saw the minimum earnings threshold required to being paying back the now bigger student loan raised to £21,000 a year. However, Treasury officials are already (less than a year later) demanding this lowered to just £18,000 a year in order to fill the gap left by spending cuts on higher education.
In the longer term, it is estimated that 39.4% of student loans will never be paid back, as graduates will not earn enough to afford the repayments before reaching the end of the repayment term. Selling the debt to private investors now, and making a future government responsible for the fall out, would allow the Coalition government to maintain their failing policies without the consequences becoming clear on their watch.
In the meantime, the cracks are starting to show:
- Student numbers are lower now than in 2010
- The UK has a lower percentage of 20-29 year olds enrolled in full or part time education than the OECD average – lower than Poland, Estonia, Hungary or Turkey (page 15)
- Since 2011 the UK government has actually cut student places by 25,000 and overseen a 40% drop in applications from mature and part time students.
Preview of Coming Attractions
Student loans gifted to the private sector have proven fairly catastrophic in the US. Student debt hit $1trn last year, and is now the highest kind of consumer debt, second only to home mortgages.
The number of seriously delinquent loans – those left unpaid for more than 90 days – has risen to an all-time high of 11%. Worse, a whopping 21% of loans have missed a payment or are not to be paid back at all. This has raised fears that student loan debt will be the source of the next financial crisis – in effect becoming the new subprime lending crisis. Whereas is 2007/8 we bailed out Banks who’d dished out unaffordable mortgages, by 2018 we could be bailing out banks who’d dished out unaffordable student loans.
Unaffordable student debt only becomes less affordable when privatised, as interest rates rise. If the state is the ultimate guarantor of these loans then when the crisis occurs, the tax payer will pick up a bigger financial burden than if the loans had remained with the state throughout.
What privatisation allows though, is a short term mega profit for private investors and a short term fiscal bounce for the sitting government – neither of which will lose out when the chickens come home to roost. There used to be a word for that…Corruption.
The Rules – An excellent movement seeking to change the broken rules of the world
Strike Debt – inspiration Occupy Wall St campaign to get rid of unaffordable debt such as student loans