Sale of student loans – confusing post-2012 and pre-2012 loans
Last week, the chancellor, Philip Hammond, told a Treasury Committee that the decision to freeze the repayment threshold on post-2012 student loans was a central aspect of the government’s plans for ‘fiscal consolidation’ and that the freeze would help a future sale of those loans.
Hammond responded to a request from Wes Streeting to reconsider the freeze:
“I would have to be frank with you and say I do not see scope for reversing that decision. It is an important part of our overall fiscal consolidation and, of course, it is also about preparing the student loan book, ultimately, for sale as an asset sale.
“I believe that student loans represent a very favourable arrangement, a very favourable structure for financing students through higher education.”
Now, the government does want to sell post-2012 loans, but this is an aspiration that has been thwarted since 2011 and which was taken off the table for the time being in 2013 by George Osborne – Hammond’s predecessor. In the latter’s statement above, the stress is on the ‘ultimately’.
The government is currently investigating a retrospective sale of pre-2012 loans starting with the borrower cohorts who graduated in the early 2000s. These loans have not had their repayment thresholds frozen – they are now indexed to RPI. In April 2017, the new threshold for pre-2012 loans will go up by 1.6% to £17 775.
The threshold on these loans did sit fixed at £15 000, but were tied to RPI a few years back in order to prepare the ground for an imminent sale. Potential buyers do not want the ‘political risk’ of thresholds moving unexpectedly in future as a result of government decisions, so the RPI-index was introduced. (It was not an option to leave it fixed at £15 000 as that would become too low in a few years’ time).
Apparently a loan sale in 2017 is looking more likely, having been delayed since 2013, but it will be these pre-2012 loans that are on offer.
So why is Hammond talking about post-2012 loans, where the threshold has been fixed at £21 000 for the next five years?
Firstly, he may not know what he is talking about and it’s pretty clear that the Committee didn’t ask the appropriate follow up questions.
More likely, Hammond knows that a freeze doesn’t help a near-future sale but that come the next parliament (2020-2025) having a threshold still at £21 000 – as compared to incrasing in line with average earnings from April 2017 – will have removed a little bit of uncertainty from loan projections (and pricings), because the threshold will be lower relative to median earnings and more graduates will be likely to be in repayment (as well as making higher repayments).
Either way, if parliamentary committees are to perform their scrutiny functions, those who sit on them need to pay more attention to what’s going on and learn how to ask the appropriate follow-up questions. And more importantly, it needs to understand that a plan to sell is no justification.
A loan sale is a bad deal for government and the public, particularly after the decision to lower the official discount rate used to value student loans. A loan sale loses money and does so wittingly as the value for money test used by government does not require that the loans are sold for what the government thinks they are worth (their fair or carrying value).