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.

And:

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.