“Debt” by http://www.lendingmemo.com is licensed under CC BY 2.0
The UK government is to (yet again) sell off part of their student loan book. This means that student loans taken out between 1990 and 1998 will now be owned by Erudio Student Loans a consortium headed up by CarVal. This is part of the long-term effort to privatise all student loans currently held by the government which are valued at around £40 billion. Along with the increases in tuition fees, to be paid for through loans, it also amounts to a sustained and systematic indebting of students. It is possible that in a few years the primary connotation of being a student will not be intelligence or critical thinking but indebtedness. Even outside of the student loan market students are increasingly targeted as potential debtors. In the last year there was reported to be an £8.5 billion increase in unsecured lending with most of this being lent to students.
The sale of student debt to private investors is one which is likely to be heavily subsidised by the government. One of the proposals of a governement commissioned report published last year was for a “synthetic hedge” to be provided by the government in order to make the deal more attractive. This would entail a government guarantee to the purchaser of the loan book if returns are lower than expected. It is not yet clear whether this has been implemented but the deal was heavily sweetened with the sale of £890 million of debt for £160 million, just under 18% of their original value. Universities and science minister David Willets proclaimed this to be “good value for money, helping to reduce public sector net debt by £160m” with no mention of the £730 million loss. The reason for such a large mark down is the fact that only 14% of debtors are currently repaying their loans. Willets claimed that there would be no changes to terms and conditions but also stated that “The private sector is well placed to maximise returns from the book which has a deteriorating value”. At least on the surface these seem to be contradictory statements. If the terms and conditions will remain the same then it is difficult to see how a private company will be any more effective at “maximising returns” than the government.
Prior to this announcement it has already been predicted, by those much more knowledgeable on economic matters than me, that, despite the claims to the contrary, private owners of student debt will soon start to “sweat the assets” or use more aggressive tactics to extract as much value as possible from their investment. Now, I am not an economist and there is probably much that I am missing but if currently only 14% of £890 million of loans are being repaid, and we assume that the debt is evenly distributed amongst the debtors, then the new creditors can only expect a return of about £124 million over quite a long duration of time. Even if we assume that all of this 14% pay off their loans before the debtors retire (when the debt is wiped) Erudio will be waiting a long time just to make their money back. Even with the government guarantee this only seems like a solid rather than highly profitable investment unless Erudio are expecting a change either in the circumstances of debtors or in the terms on which their repayments are made.
Since the introduction of student loans they have been presented as “good debt”, that is, debt which is only paid back if the debtor is earning enough to be able to pay it. These are very favourable terms for the debtor but if they were to be changed it would be likely to considerably alter the way in which people engage with higher education. The approach to social security which has been taken by this coalition government (which is an intensification of the policies of successive governments over the last thirty years) is one which has been characterised as “asset based welfare“. This is an approach in which rather than the state providing social security by paying for “public goods” such as health and education, increasingly we are expected to pay for it ourselves through the accumulation of assets or investments. “Privatized Keynesianism” of this kind was pioneered in the housing market, which was reformulated as an opportunity for long term individual (or family) investment, the profits from which would make up for the short fall in state pension provision. This approach is, however, predicated on continuous, unending growth and citizens who are “monetary conservatives“, that is, rational, prudential, forward thinking investors and planners.
As students become more indebted and if the terms of this debt change, combined with the fact that students are taking on increasing amounts of private debt, it is possible there will be a similar shift in higher education as was seen in housing. The kinds of “individualised political values” and striving for constant growth which are necessary for the housing market to function could be transferred, in some form, to students. The relationship between students and universities is already beginning to take on characteristics of a consumer-provider relationship. If students are pushed into thinking primarily in terms of maximising the return on their investment (in order to repay their loans) then well-established values of higher education are likely to be sidelined.