David Willetts’s recent suggestion that universities might buy the loan books of their own students has generated some ill-considered reaction, so Nick Hillman’s comments are valuable.
Nick points out first that there is no necessary link with any selective increase in the fees cap. And, given that much of the instant comment has assumed that the loan books of universities with stronger graduate employment records will be more attractive purchases, Nick points out that in a sale at market price, the expected repayment record is already factored into the sale price.
A university will make a gain from owning its student loan book not if it has a strong graduate employment record but if its graduate employment record turns out to be stronger than the expectation built in to the purchase price. That’s the incentive effect the scheme would have.
It’s important to have this correct perspective on the proposal. But it’s also important to note that the general economic objections raised by Martin Wolf, Andrew McGettigan, me and others to the sale of student loans remain valid. The government discounts future payments at a lower rate than other agents, including universities, so will value the expected repayments on student loans more highly than potential buyers of the debt: the government receives less from the sale of student loans than the value of the loan book to itself. Furthermore, since repayments are made through the income tax system, the government has a better chance than other potential owners of the debt to ensure that repayments are as high as possible.
To these need to be added a further specific, esoteric but important point: the student loan book of its own graduates is, other things equal, an unattractive financial asset to a university. A typical English university is short of financial assets: its capital assets are mostly buildings, often loan-financed, and since the buildings may have low value in alternative uses, the financial security of the university depends critically on its success in the student market. It should want its financial assets to be diversified, marketable and specifically unrelated to its unavoidable business risks. Its student loan book is undiversified, difficult to sell, with a risk that is strongly positively correlated with the university’s business risk: adverse performance in the graduate employment market will reduce the value of the loan book and will also push the university down the league tables and make it harder to fill its buildings with fee-paying students, home and foreign.
Finally, the value of the student loan book depends on the employment performance of graduates who have already left the university. A university may have considerable influence over the employment prospects of its current students, mainly through the portfolio of subjects it chooses to offer; but it has very little influence on the prospects of those who have already graduated. Holding the student loan book may make a Vice-Chancellor wish that different decisions had been made in the past (or to be more realistic, will add to the long list of past decisions that a Vice-Chancellor wishes had been made differently) but has a rather blunt effect on current decisions.
I do not agree with the many commentators who think there is something unworthy about universities being encouraged to focus on the employment prospects of their graduates. It’s not the only objective a university should have, but it is a worthy objective. There must, however, be better ways to encourage universities to give more attention to graduate employment than saddling them with their student loans.
Alasdair Smith, 4 August 2014
Alasdair Smith was Vice-Chancellor of the University of Sussex from 1998 to 2007. HEPI thanks him for this guest blog.