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Were Student Loans Sold Short? By Phil Bird, CEO of Perfect Channel
“It’s time we woke up to new technologies to improve returns when selling secondary market assets.”
he Government’s recent announcement of its sale of student loans to debt management consortium Erudio has raised a number of interesting questions. For the students concerned, who took out loans between
1990 and 1999, how do they feel about their debts now being owned by a private company rather than the Government? And for the wider public, with a £900 million portfolio of ageing loans which were sold for only £160 million, has the Government really got good value for money or has the public purse been short changed?
According to Universities and Science Minister David Willetts, “The sale of the remaining mortgage-style student loan book represents good value for money, helping to reduce public sector net debt by £160m. The private sector is well placed to maximise returns from the book which has a deteriorating value.”
So the Government is trumpeting this as good value for money. So much so that Chancellor George Osborne has already announced that the revenue has been ear marked to fund an additional 30,000 university places next year. But while the politicians
may already be spending the money they feel represents good value, I believe that by using the most advanced auction technology, a number of key factors could have significantly improved the Government’s return, netting more money for the public purse.
We are likely to see significant increases in these sorts of transactions, when it comes to selling public sector loans to private companies. As the Government looks to clear more debt off its balance sheet the marketplace for this type of deal with undoubtedly grow. And just like any financial institution, selling off a secondary market product, from mortgage books to ageing loans, generating the best return in terms of ‘good value for money’ should be a major focus.
The Student Loan Market New figures suggest that up to 40% of new loans issued to students to pay for their degrees may never be paid back (rising from an estimated 28% in 2010) according to recent comments from Martin Donnelly, the permanent secretary at the Department for Business, Innovation and Skills (BIS). Meanwhile the National Audit Office has produced a critical report that suggested over £5 billion of public money paid
out in student loans is unaccounted for because the Government had insufficient information about the recipients.
Margaret Hodge MP has said that the proportion of loans issued that BIS does not expect to be repaid was of “massive cost to the public purse”. Under the current system, students repay their loans only when they are earning a certain annual salary – now set at £21,000 – and repayments are linked to their earnings.
Much like any other group of financial products, the student loan book is essentially a portfolio of illiquid assets, with a deteriorating value, becoming harder to collect over time. A key characteristic of each student loan is the choice of college and type of degree. Return on investment is intrinsically linked to each student’s future employability, so one factor to take into consideration is that a student graduating from an IT course is likely to have an increased chance of paying back the loan compared to a Liberal Arts graduate. So each loan can be graded and categorised in terms of risk, just like any other illiquid asset.