Stop the Sale of Student Loans

Posted by Matthew Heap in

Since the Government started to sell its student loans book to private consortiums late last year, many will not have noticed a change. However, are students really aware that the money that they were previously borrowing from the Government is now from private lenders and what does this mean to students? In late 2013 Erudio Student Loans won the bid to buy 17% (£890m of debt) of the student loans on Government books for £160m. The 250,000 mortgage style loans were made to students between 1990-1998. At the time only 14% of students attached to these loans were making repayments. An astonishing 46% are not making repayments as their income is below the £28,775 threshold. The lenders assured minsters that the terms and conditions of the loans would not change and would adhere to the Office of Fair Trading's guidelines on the treatment of vulnerable borrowers.

On 27th June 2013 it was proposed in parliament to sell another tranche of student loans made between 1998-2012 to the private sector. The proposal included the removal of the existing interest rate cap. Rothschild investment bank worked upon the feasibility study, which was submitted to the business department in November 2011 where it is understood to still be under review without formally being made public. Removing the cap would certainly burden graduates with additional years of repayments. One indicative calculation suggests that an employee on £25,000 a year, with £25,000 of undergraduate loans taken out before 2012, could work until retirement without ever paying off their debt if the interest rate cap was removed. An online e-petition was formed against the proposal receiving over 20,000 signatures.

A recent article by money-saving expert Martin Lewis has raised concerns that those who have deferred payments, due to not meeting the annual earnings threshold of £28,775 are having payments wrongly taken from their accounts by Erudio. Many former students have been taken by surprise that the firm are chasing payments in additional to complaints of 'invasive' questions from the company.

Student debt in the public domain will inevitably lead to more aggressive debt recovery methods than those employed, or rather, not employed by the current government. Private companies purchasing student loan books are doing so for commercial gain. The true debate lies in analysing the net welfare effect of private student loans versus state-supported student loans, which are more likely to result in bad debt for the UK economy.

Image courtesy of Flickr, Creative Commons