Sale of loans – media coverage a success for government

The government will be pleased with the way the press covered its announcement about selling student loans yesterday.

Firstly, it was keen to impress on borrowers that there would be no changes to their terms and conditions and that SLC and HMRC will continue to collect payments as they do now. In regard to the latter point, this sale is therefore unlike the sales of mortgage-style loans in the late nineties and 2013, when the outstanding balances were sold to specialists in debt collection. Mortgage style loans were collected solely by SLC through direct debit and the government declared a profit on the deal, because the purchaser decided it would pay more than the fair value of the loans in the government accounts – because the purchaser believed they could do a better job of collecting outstanding payments and crosschecking the information people put on their loan deferment forms with other financial declarations.

The NUS and others have been targeting a potential sell-off by warning borrowers that the purchasers might have the power to change terms and conditions. As I’ve said on here recently, that’s not the case. Legislation prevents third parties from doing that even if they purchase loans outright (and we’re now talking about a securitisation not outright sale). And government will avoid future changes by fixing terms in contracts – it is otherwise hard to get purchasers to play ball: they want as much uncertainty removed as possible so that they can work on a price.

Here’s the key point – the repayment threshold for pre-2012 loans is now permanently indexed to RPI to enable a price to be agreed. The preparations for the sale of pre-2012 loans have improved the situation for borrowers – a higher threshold means lower repayments.

So why does it look like the sale of loans is a bad deal? Because it’s probably a bad deal for the public finances. Which leads to the second point.

The government knows it is likely to make a loss on the loan sales. A profit or loss – which will crystallise in various measures of the ‘deficit’ – is determined by the price it receives compared to the fair value of the loans (in the accounts).  Every major outlet – including the FT – has taken the government’s lead and written about the proceeds likely to be lower than face value.

This isn’t news – we know loans aren’t worth the face value. That’s what all the coverage on non-repayment is about – the government thinks it loses 25p on every new £1 loaned, so the loans can’t be worth their face value.

The issue is the fair value. And as I said in the previous post, whether the government makes a loss or profit is not the same as whether a ‘value for money’ test is passed. The government has a skewed VfM test that values present money higher than the fair value does – that means it will determine a lower value for the same projected cash stream.

The government recently lowered the discount rate used in the fair value calculation of loans (from RPI + 2.2 to RPI + 0.7). It hasn’t done the same for the ‘VfM’ discount rate which starts at RPI + 3.5 (1 percentage point is then deducted for catastrophe risk and a risk element specific to loans is added back in).

This ‘social time preference’ rate (the ‘Green Book’ rate) hasn’t been changed for a decade and supposedly captures society’s preference for cash today over future cash.  In essence it captures a short-termism in government thinking: ‘the polite expression for the rapacity’ (Harrod) with which present reason views the future.

In student loan sale coverage, there’s a great deal of difference between following the press release prompts to observe that “of course, the price won’t match the face value” and asking whether the loans have been sold for less than the government says they are worth in the accounts.

A late aside: even if the government is successful at this point and manages to raise £12bn over the next 4 years without losing too much, we’re still a long way from where we are meant to be.

The original plan was to sell new loans as they are issued. This protracted retrospective sale is a fallback option – the main goal is still to get there. It’s easy to see why: that £12bn over 4 years will be dwarfed by this year’s £15bn+ of new loans. New issuance is set to pass £20bn before the end of parliament.