Wednesday 06 February 2008

Government set to privatise student loans

Earlier this month a bill regarding student loans quietly passed through its final reading in the House of Commons.

It will allow the Government to raise up to £5bn by taking a chunk of the student loan book and selling it off to private banks. This loan book which represents the income stream derived from graduates paying interest on money borrowed from the Government to finance UK university courses which is currently worth £17.5bn.

The reasoning behind this move by the Government, is that The Treasury needs cash. It looks likely that Alistair Darling will overshoot his own forecast for public sector borrowing of £39bn for the year to 5 April 2008 and £39bn was already £4bn higher than Gordon Brown predicted during March 2007.

So this latest disposal is part of a “£35bn drive to plug gaps in the public finances”, says The Time. Government departments have been under enormous pressure to identify “surplus” assets, such, such as the student loan book, that can be sold off.

Aside from the obvious boost to Government coffers, the Treasury under New Labour has long argued that selling public assets to the private sector not only results in them being managed more efficiently, but also increased the stability of public finances: in this such case, by reducing taxpayer exposure to any defaults on student loans.

The sales process will work oddly enough much in the same vein as the rather discredited “structured investment vehicle” arrangements favoured by the investment banks for the sale of similar, but higher risk, mortgage receivables.

The idea, says MP John McDonnell in “tranches”, of student debt to a separate “special purpose vehicle” (SPV) for cash. The SPV will raise the cash by creating and selling bonds secured on the pool of student loans.

This technique is handy, if a little long winded, as it enables the Government not only to raise the cash but also to keep the bonds issued by the SPV “off balance sheet”, a phrase which translates as “out of the public borrowing figures”.

The Banks are likely to profit by purchasing bonds issued by the Government’s SPV, which will be sold to cheaply to reflect largely non-existent default risks, then cash them in for a profit on maturity.

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