9 May 2022

With the public finances in a mess, the Government should revisit the sell-off of student loans

By Charles Bromley-Davenport

Many things age badly. Milk curdling in the fridge, bananas left to rot, and jokes from 1970s television shows. Yet few rival the March 2020 Treasury paper, ‘Review of the Student Loan Sale Program’. 

Published one week prior to the first Covid lockdown, the paper justified the decision to halt the sell-off of student loans because, quote, ‘…debt is now expected to be broadly stable over the medium-term…the Government has therefore taken the decision that it will not proceed with further sales of student loans’.

Two years and near £500bn in public debt later, the Government should seriously  reconsider this decision. Resuming the sell-off will shore-up Treasury coffers and create some badly needed fiscal headroom.

The history of this policy is very much a stop-start affair. Following on from Gordon Brown’s Sale of Student Loans Act 2008, the Coalition government announced their intention to sell off portions of the student loan book in 2013, only for then Business Secretary Vince Cable to halt the program in 2014 – a decision estimated to have cost the Government about £12bn. Fast-forward to February 2017, and a fresh announcement that a portion of the loan book would be sold off, followed by another tranche in December 2018 – only for the programme to be stalled again in 2020. 

The benefits of privatising the debt were clear enough: through selling the rights to student loan repayments to banks and hedge funds, it offered both a significant source of revenue for the Government, and a stable investment for private firms. On the investors’ side, this proved a profitable scheme with minimal risk, as redundancy was the only realistic way in which someone would default on a student loan payment. For the Government, the sell-offs raised £3.6bn across 2017 and 2018.

Of course, it was a policy that provoked plenty of political opposition. Though the Government making money from a twenty-one year old’s psychology degree can hardly be compared to selling-off the family silver, the obscure nature of how the debt was securitised and the very fact investors were making money from debt-saddled graduates was a deadly combination for trade unions and student activists. 

And yet, despite what Student Union reps would have you believe, graduates were protected throughout. Sales of the loans were structured so that the students themselves were unaffected, while also continuing to be serviced by the Student Loans Company (SLC) and HMRC. Moreover, investors were not able to contact borrowers themselves, and have no control over the terms of the sold loans.

And remember this only affected a small part of the overall loan book, there is still plenty on the government books. Indeed, the original loan sell-off was meant to continue to 2022-23 and raise around £15bn.

That’s money that could be used to take the burden off young graduates, particularly given the cost of living crunch they are now facing. Interest on loan repayments could be indexed to CPI, as opposed to the widely discredited and notoriously higher RPI baseline, which is set to increase to 12% this year. That could potentially save graduates thousands of pounds across the next few years. 

It’s not just about graduates though: that money could also be used to finance new opportunities for apprenticeships. The introduction of maintenance grants for apprentices could expand the opportunity to a wider demographic, specifically those from lower-income backgrounds. Apprenticeships have long been an effective tool for social mobility, with 90% of those who undertake such schemes staying in employment following completion. With the number of apprentices from working-class families in decline – currently at 18% compared to 26% just seven years ago – the need for decisive action is clear.

There are few easy answers to the Covid-induced debt pile-up and cost of living crisis facing the UK, but the Government needs to grab whatever low-hanging fruit it can. Revisiting the sell-off of the student loan book would be a simple way to raise much-needed fund and, equally importantly, offer some respite for our short-changed young people.

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Charles Bromley-Davenport is a Research Associate at the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.