What’s happening to our student loans?

The subject of this blog is not a new topic or breaking news story, but for some, this might be the first time you’ve ever read about the plans to privatise student loans. The implications of this move are incredibly serious, some might even argue as serious as the tripling of tuition fees, yet the media silence on the subject has been overwhelming. This has to change. If the government thinks it can get away with doing something quietly, then it’s far more likely to go ahead with it. But first, what is happening to our student loans?

Danny Alexander revealed a few months back of the government’s plans to sell the student loan book to private investors. This has since been confirmed and is due to take place by 2015. The government commissioned the Rothschild investment bank to write a document, named ‘Project Hero’, . This advised the government on the sell-off, and what private investors could be offered with the sale of the loan book. An estimated £40 billion of debt is being targeted, composed of loans to students between 1998 and 2012.

Obviously investors want a return on the original payment they make to secure the loans, but the kind of debt generated by student loans is risky for investors as much of it won’t be paid back. The government’s own estimates such that 40% will not pay back their debt in full, but some research suggests the figure could be as high as 85%. For this reason student loans will need sweeteners to make them more attractive to buyers. One way is through “synthetic hedging” – promising whoever buys the student loans that they will be paid the difference between the actual cash flow and the estimated cash flow which would have been received without the cap. This is using public finances to guarantee returns to private investment and will cost the government greatly. Financial experts has rushed to criticise the move, with Martin Wolf from the Financial Times branding it “economically illiterate.” Yet for the government’s short-term agenda of securing re-election, it allows them to claim that they have gotten rid of the deficit and kept their election promise. However, this is a cosmetic move which will end up costing us much more in the long run.

The use of, and high cost of, a synthetic hedge could potentially be used as an argument in the future for changing loan repayments or further cutting the HE sector. The other way to guarantee investors a return is to remove the cap on student loans. Currently, the interest rate on our loans is the Bank of England base rate +1%, so it’s 1.5% right now. In America,  the interest rate is 6.8%. Vince Cable has promised they won’t do this, but assurances made by this government have no bearing on what future governments might do. Once the loans are sold and the sweetener is being paid, there is a good chance that the government will decide it can no longer afford to pay the sweetener (which it has to pay for 25 years!) and transfer the cost onto students and graduates instead by changing their loan repayments. We shouldn’t buy the NUS’ assurances that the problem is now solved as this is far from the case.

If the sale is to go ahead, we’ll be starting down a path from which there is no return. Once the loans are privatised, they’ll be out of the government’s hands and ultimately lose accountability. If this lot of loans are privatised, it seems incredibly unlikely that they will decide not privatise all loans in the future. We’ll be condemning people to a life of never-ending debt, which becomes impossible to pay off. We’ll be opening the door to profit being extracted from the fundamental right of education and we’ll be allowing private companies to decide the fate of students and graduates. The disastrous stories coming out of America demonstrate how we cannot allow this to happen.

This is potentially as, if not more, serious than the tripling of tuition fees in terms of the long term impact it could have on people’s lives. We need to be pulling out all the stops to prevent this from happening. The National Campaign Against Fees and Cuts have already called for action to take place this term and I urge students and unions across the country to begin campaigning on this issue. A couple of years ago, the government withdrew the Higher Education White Paper, fearing the backlash from the public. We must again deter them from worsening the conditions of our education and sinking us further into debt by making this move politically toxic for anyone involved. Look out for a forthcoming campaign by the Guild, letting people know what’s happening to their loans and what they can do about it.