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Universities as buyers of graduate debt

In light of the coverage being given to the idea that universities could buy their own graduate debt, here is a reminder of the article I wrote for False Economy in December to accompany the publication of Rothschild transcription (available as a pdf on the site).

Here are some key extracts from the article:

One of the most interesting aspects of the Rothschild review is the detail provided on the rejected models, not least because of the centrality of the suggestion that universities could be encouraged to underwrite the risk of poor graduate repayments through debt issues or equity stakes in special purpose vehicles.


What was most crucial though is managing the decades-long transition to steady-state. Rothschild makes clear, the private sector do not have that kind of risk appetite:

“However the [risk] allocation of the Utility structure involved the private sector taking short term risks (and rewards) on the performance of the portfolio, with Government retaining the longer term risks (and rewards).”

Meaning that the government would continue to cover the longer term risks even with a ‘subsidy and rebate mechanism’. Basically it needed engineering to distribute the annual income pool in such a way as to keep the private sector interested. With the government tied in as backstop, the Office for National Statistics determined that insufficient risk would be transferred to the private sector. The main aim of a sale was stymied.

‘Utility’ was therefore discarded and the government has fallen back on the idea of a ‘one-off’ sale of its existing stock of income contingent repayment loans: precisely what the White Paper said it would not be pursuing. Rothschild are clear: they would like the case to be reviewed and a way found for ‘universities (in the private sector) [to] take the long term economic risk’. Were this to be packaged up with exemptions from the maximum tuition fee, with some of that income deferred through the ‘Utility’ dividends, then some wealthier universities may well consider such an option (despite the transformations it would effect on academic relations).

Since the government seems to believe that it can move towards a sale of the ‘coalition loans’, this may be a model at the forefront of HE policy in the 2020s.

The £160m Sale of ‘Mortgage-Style’ Loans

The BIS Committee have got themselves into a bit of a tangle discussing the sale of mortgage-style loans in 2013 (§§58-65 of the report).

That sale saw the government receive £160m on an asset with a face value of £890m (what the outstanding balances say borrowers owe to the government).

So we know the price and we know the face value of the loans.

What we didn’t know was what the government thought those loans were actually worth (the fair or carrying value): how much income was going to come in and when.

Having those three distinctions in mind -price, fair value, face value – is essential for considering loan sales.

I was asked explicitly about the 2013 sale at the evidence hearing.  Read more…

“Logical flow-throughs” – is expansion funded by a sale? (redux)


with added relevance today

Originally posted on Critical Education:

Plashing Vole has shared some correspondence with Wolverhampton MP, Paul Uppal, relating to higher education and student loans. Uppal is David Willetts’s parliamentary private secretary, which makes one particular paragraph extremely interesting.

Regarding the proposed programme of student loan sales, Uppal writes:

Current market conditions are favourable and BIS advisors have confirmed there is potential interest from a range of buyers in investing in the loan book. This has informed the estimates of potential proceeds of approximately £12 billion over a five year period. It has been calculated that the additional outline of loans for the expansion of students numbers over the forecast period will be more than financed by proceeds from pre-2012 loan sales. If the sale of the loan book does not go ahead or does not provide the expected receipts, The Treasury will need to consider the impact on public sector net debt. This will be a…

View original 223 more words

BIS Committee report into Student Loans published

The BIS Commitee has published its report into student loans. Two evidence sessions were held in December and January. I appeared at the first, David Willetts at the second.

Events may have overtaken the findings that do not simply echo the conclusions of the  National Audit Office in November.

At the weekend, Vince Cable announced that he will not authorise a sale of the student loan book. That means that the Committee’s concerns about getting value for money from the putative private sector loan purchasers are rendered academic for the time being. (I am grateful to the committee for the open discussion of the ‘synthetic hedge‘, a financial instrument devised specifically to overcome the interest clause on the income contingent repayment loans issued to those who commenced undergraduate study between 1998 and 2011.)

Cable told Liberal Democrat members:

“The government was considering the sale of student loans on the basis that it would reduce government debt. Recent evidence suggests this will no longer be the case. Given there is no longer any public benefit, Nick Clegg and I have agreed not to proceed with the sale.”

What implications might that decision have for higher education funding? The Committee’s report underscores just how confusing and inconsistent  ministers and the chancellor have been about any link between loan sale proceeds and the promised expansion of undergraduate places. Osborne’s Autumn Statement insisted that the first would pay for the second, though he retreated a few days later to a different claim: that the cash from purchasers would help the expansion through the early years.

In the January evidence session, Matthew Hilton, a civil servant in BIS, told the Committee:

 “It would be fair to say that the Treasury do intend to underwrite this policy. If there is a shock to their expected budgets that changes some of the planning that they have in hand, we would have to sit down and talk to them, as would any Department; but there is no logical flow through from a decision on the loan book to a decision on the expansion of HE budgets.”

Willetts sent a subsequent note insisting that “the announcement on removing the cap on student numbers is fully funded”.  But Willetts’s permanent private secretary told a constituent a few months later that were the sale to fail then these commitments would be reviewed. Apparently sources close to the Chancellor have been insisting that nothing has changed as the loan sale was earmarked to pay down public sector net debt: this shows a marked lack of understanding of the cash streams involved here.

As I said back in December, the Autumn Statement smacked of bad bunko gimmickry. The BIS Committee report stresses that the basics, such as the ability to value the loan book accurately, were not even in place back then.

§42 A common thread in our inquiry and that of the Committee of Public Accounts was the lack of a solid evidence base on the data underlying the student loan-book.

We should note that the Autumn Statement assumed that the equivalent of 65 per cent of loans issued would be repaid; we now have an official estimate of only 55%. On over £10billion of loans per year that’s a shortfall of £1bn. As things stand, we do not know what the immediate consequences for the expansion policy will be as a result of Cable’s stance. Cable spent yesterday afternoon/evening in an emergency meeting.

The department for Business, Innovation & Skills has not been able to provide a statement that would shed light on these matters, only that ‘There are no plans to conduct a sale during this parliament.’ I asked about further work on the sale and whether a tender might be published before the general election but have not yet had a reply.

The Committee offer the following summary:

§78 The Government appears to have committed itself to the sale of the income contingent loans before it has fully assessed the financial viability of such a move.



The OBR will amend its fiscal forecasts. New ones without the net loan sale proceeds will appear at the next Autumn Statement (December?).

2013 Autumn Statement – is HE expansion fully funded by loan sale?

Originally posted on Critical Education:

Back in December and January, I discussed here some problems with the figures presented in the 2013 Autumn Statement relating to the sale of student loans and how the gross proceeds would fund the expansion of undergraduate places. The problem was basically that the Treasury used an estimate of gross proceeds, rather than net, and thereby overstated the revenue generated by a sale of loans to the tune of roughly £1.7billion. If you sell loans to the private sector, then the private sector receives the repayments instead of you and you have to reduce your estimated income accordingly.

Appearing before the BIS committee in January, David Willetts denied that any ‘schoolboy howlers’ had been committed and promised to set out the proper figures in a written statement.

That statement has now been published on the BIS committee website.

“The headline remains that the announcement on removing the cap on…

View original 456 more words

Sale of Student Loans – not in this parliament?

A tweet from the Social Liberal Forum conference today appears to suggest that Vince Cable and Nick Clegg have decided to oppose any sale of income contingent repayment loans.

Tuesday will see the publication of the BIS Committee’s report into student loans and their sale.


A BIS spokesperson said: ‘No formal decisions on timing have been made.’

Under the terms of the 2008 Sale of Student Loans Act, the decision to proceed with a sale rests Vince Cable as the relevant Secretary of State.


Warwick University Ltd – book review

My review for Radical Philosophy of the re-issue of Warwick University Ltd (1970) – edited by EP Thompson - is now available online.

It is hosted by Warwick University’s UCU branch, where you can also find proceedings of a conference held on 6 June 2014 to discuss the book.




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