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Selling student loans to universities: what’s been missed?

  • 4 August 2014
  • By Nick Hillman

I’ve resisted the temptation to say much about the proposal to sell off parts of the student loan book to universities so that they come to own their former students’ debts. The story was covered extensively by Newsnight last week and in the newspapers afterwards, including in a piece published in the Financial Times written by David Willetts, who is the originator of the idea (and my former boss).

But the story has lived on, featuring for example in the Sunday Times over the weekend (‘Students face £16,000 fees for Oxbridge’), and so it seems a timely moment to make two points about it that have been missed.

1. There is no direct link between raising fees and letting universities own part of their own loan books. The idea of selling loans to universities has been written up as a clever way of enabling Oxbridge to charge more. But, even if legislation were passed enabling loan sales to universities in the way proposed by David Willetts, there would still need to be separate legislation raising the fee cap. And, until those universities that claim it costs £16,000 to teach an undergraduate explain the figure properly, there is zero chance of a majority of MPs in the House of Commons voting for it. Note that, on Newsnight, David Willetts defended the £9,000 cap as sufficient and highlighted the continuing payments from HEFCE for more expensive-to-teach subjects.

2. The press coverage has suggested that the oldest universities are likely to welcome the whole idea of owning their loan books, while the press releases from Million+ and University Alliance – which typically represent newer institutions – are quite negative about the idea. Irrespective of whether it is a good idea or not, this has left a false impression about the likely impact of the policy were it ever to be implemented. Remember, David Willetts says his policy is about improving incentives. Graduates of the most selective universities are likely to have the best loan repayment rates, so there is little scope for anyone – including their former universities – who buy their loans to reduce their non-repayment rate. In contrast, imagine a fictional university where the non-repayment rate is 60% and which purchases £100 million of loans at, say, 40% of their face value (£40 million). If that institution could reduce the non-repayment rate for their graduates to 50% they would make £10 million for reinvesting in education – not to mention the extra donations they could try and secure through having better contacts with their alumni. I am not saying the policy would work exactly like this, or that such a significant reduction in the RAB charge is realistic. I’m just trying to show that the policy might not affect different institutions in the way people think. Whether any institutions would wish to purchase their loan book and whether the policy will happen are separate questions.

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