Student Loans

[Quicken]

A letter in the Guardian from an Oxford prof:

Are today's second-year students the unluckiest cohort ever?

Now the government is looking at proposals to sell off the £40bn loan book held by the Student Loan Company as part of a new wave of privatisations, which began with the Royal Mail. A wealthy few will make a profit out of your birthday misfortune by lending you money. But you won't have a choice. Earn enough, and by law you'll be required to repay that huge loan that you – in effect – agreed to take out when you were a child. That is because it was when you were a child that you chose to try to go to university.

At some point someone may test the legality of the deal you entered into so young. That someone could even be you. Ask yourself: who negotiated on your behalf the terms of that deal you have signed up for? Every year the secretary of state adjusts the interest rate you will have to pay. They don't have to go to parliament to do that. You cannot read the small print that a future privatised Student Loans Company will insert. You may find that, as with certain other financial "products", you have been mis-sold this deal.

Interesting idea.

At age 18, in summer 2012, you entered university and, in doing so, you agreed to pay back around £27,000 plus a lot of interest. They told you that you would only have to pay it back if you earned £21,000 a year. They didn't mention how for your parents, grandparents and great-grandparents, inflation has always meant that what appears like a good wage now will probably seem a pittance in the future.

No matter what the future inflation rate, you will still have to start paying back the loan at that threshold. However, the outstanding loan will be greater by then. Currently it is rising by the retail price index plus up to 3% interest each year.

Perhaps the next step could be to triple lock it at a minimum of RPI+3%, wage inflation+5%, or 7.5%, and increase previously capped rates retrospectively as proposed earlier in the year.

The problem for the government is that they want to privatise the student loan book, but pre-2012 loans are currently capped at the lower of RPI or the base rate+1%, and negative real interest rate policy makes that rather unattractive to investors. Rather than a push the end ZIRP, expect a juicy state subsidy, the younger generation being screwed over, or more likely both. There's an e-petition on this here.

Q

[Sancho Panza]

Selling off the loan book would be politically convenient in so many ways.

[interestrateripoff]

The debt drag of this is going to last generations, it's excellent can kicking by our political "elite". I wonder how many will end up trapped in low paid work because taking a slightly higher paid job will mean crippling repayments on a debt that's impossible to pay off.

Can't remember which poster it was who posted the compound effect of accumulative interest on student loans but it was frightening to look at.

The young have been well and truly fecked over with this deal.

[TheCountOfNowhere]

Will the loans be waived if/when a BIG war comes and they are sent out to "serve" their country ?

[Quicken]

An interesting opinion piece from Andrew McGettigan here.

The advantages and protections of these pre-98 loans persisted even after the balances were sold to the company that became Thesis Servicing.

Since 1998, we have seen many changes in the loan scheme – all affecting new cohorts. The most obvious is the introduction of income contingent repayment loans which means that the monthly repayments are relative to income, rather than initial amount borrowed. The original debt taken can limit the total amount repaid, though it is more likely for most that the debt will be written off (after 25 years after graduation for those with recent loans, 30 years for those taking out the new loans in 2012/13).

What concerns me is not simply the complexity of income contingent repayment loans, but that many of the protections I enjoyed have been removed.

The new loans are not covered by the Consumer Credit Act and interest rates can be set at the discretion of the relevant Secretary of State using secondary instruments, as can the other details of the scheme, such as the repayment threshold (and percentage determining level of repayment). Although the current government has stated its intention to set real rates of interest (ie above inflation) it has given itself powers to set rates much higher than that.

The 2011 Education Act, which received Royal Assent last November, Education Act now allows governments to set up to market rates of interest on student loans using statutory instruments (rates must be “lower than those prevailing on the market, or no higher than those prevailing on the market, where the other terms on which such loans are provided are more favourable to borrowers than those prevailing on the market.”)

Having recognised this lack of statutory and legal protection, what do the terms and conditions of the student loan agreements say?

The clause that currently appears in the 2012/13 “STUDENT LOANS – A GUIDE TO TERMS AND CONDITIONS” allows future administrations great leeway to change terms and conditions.

“You must agree to repay your loan in line with the regulations that apply at the time the repayments are due and as they are amended. The regulations may be replaced by later regulations.” (p. 8)

It is clear that the loans are not merely income contingent, but future-policy contingent.

More along the same lines here.

The sale of the student loan book will make an entirely illusory contribution to deficit reduction. Government debt will be reduced by the sale proceeds, but the income stream from debt repayments will be lost to the government; the net burden on future taxpayers will be unchanged. There’s a rearrangement of the government’s balance sheet, and a reduction in the government’s gross debt, but no change in the government’s net debt. Current public accountancy covers government non-pension liabilities but ignores most government assets.

Furthermore, as Martin Wolf has argued, the government is better placed to meet risks in the student loan book than a private purchaser, so the government will not actually get a fair price on the sale.

It is, of course, true that a retrospective increase in graduate loan obligations will make the loan book more attractive to the private sector and increase the amount that the government could expect to raise from the sale of the loan book. The Department of Business, Innovation and Skills (BIS) has no doubt paid an eye-watering fee to Rothschilds for this statement of the blindingly obvious.

The use of creative public accountancy to manage the finances of BIS is not new. As I and others have pointed out, the introduction of higher fees in 2012 makes little real contribution to government finances for many years, even decades. Still more remarkably, the BIS budget will benefit in the immediate future from the sale of the assets of the Royal Mail pension scheme, which was transformed last year into an unfunded scheme, thereby crediting its assets to the government, while keeping its liabilities off the government’s books.

A retrospective increase in graduate loan interest rates and the subsequent sale of the graduate loan book is a package which has political attractions: a highly selective increase in income tax which doesn’t look like a tax increase, a balance-sheet reorganisation which looks like a reduction in government debt, and a contribution by BIS to deficit reduction which isn’t a real contribution (except from the unfortunate targets of the tax increase).

[R K]

Like MBS etc most of this cr4p will end up on the BoE balance sheet at some point in the future.

That's probably why they created it in the first place.

[fluffy666]

From the POV of having a 6 year old and an 8 year old.. I genuinely dread what it's going to be like in 10 years.

Annoying thing is that I started a savings fund for each when they were born with the aim of being able to pay tuition fees, allowing for RPI increases in the fees. Ha. They'll start charging for 6th form by the time they turn 16, never mind Uni..

[Errol]

Student loans and food stamps are just another form of money printing.

[19 year mortgage 8itch]

From the POV of having a 6 year old and an 8 year old.. I genuinely dread what it's going to be like in 10 years.

Annoying thing is that I started a savings fund for each when they were born with the aim of being able to pay tuition fees, allowing for RPI increases in the fees. Ha. They'll start charging for 6th form by the time they turn 16, never mind Uni..

On the basis it goes TU at some point in the future, why would you risk paying them up front? Do you not consider that a possibility?

[fluffy666]

On the basis it goes TU at some point in the future, why would you risk paying them up front? Do you not consider that a possibility?

Yes. Fun dilemma, isn't it..

[Wurzel Of Highbridge]

Like MBS etc most of this cr4p will end up on the BoE balance sheet at some point in the future.

That's probably why they created it in the first place.

Not until Barclays or Goldman have bough it cheap then offloaded it to BOE for a tidy profit.

I bet they make a deal that packages up future student loans with the juicy 8% compound interest with the old loans that are BOE+1%, then sell the lot below face value.

The loan book will be offloaded to some organization that in a few years time will be facing bankruptcy, and cries of no more student loans unless BOE/Government bail it out.

We have seen it all before, time and time again.

[cashinmattress]

Cambridge and the other 'elite' universities want tuitions rise to £16k or more per year.

Unless you are going into engineering or a recognised business school you aren't going to find it easy to get a job in the UK that pays enough to have a decent standard of living.

Without the above you will find it even more difficult to find work abroad as well.

[MrPin]

It's all going to pot!

There are too many Universities, and there will not be enough customers willing to borrow from a bank for the privilege!

Even the OU is expensive now.

[Neil D Possitt]

I had an old pre-1998 student loan which was in the first batch sold to Thesis Servicing/Link Financial several years ago. I got so fed up with dealing with Thesis Servicing that in the end I took out a 24 month 0% credit card and settled my balance with Thesis using that, paying as much off the card each month as I possibly could to clear it before the 0% period ended. Fortunately one (the only?) advantage of the debt being with Thesis is that they don't charge a fee for paying by credit card, whereas the Student Loans Company themselves do.

In doing so I lost the ability to defer repayments, and certain other legal advantages of a 'proper' student loan, but I thought it was worth it not to have to deal with Thesis any more, and it was nice to think that my settlement cost them a hefty credit card processing fee, and deprived them of a couple of years worth of interest.

Edited October 31, 2013 by Neil D Possitt

[Executive Sadman]

Ive said it before, but at least the banks only target people who are legally adults.

The university bloodsuckers send snake oilers to convince 16 and 17 year olds to schools to lie about future earnings and employment.

Utterly shameful.

[chronyx]

They should definitely be bailed out at the expense of those of us who didn't go to Uni as it didn't seem worthwhile.

We had the audacity to deliberate over an important decision and come to a reasoned answer.

[MrPin]

They should definitely be bailed out at the expense of those of us who didn't go to Uni as it didn't seem worthwhile.

We had the audacity to deliberate over an important decision and come to a reasoned answer.

I certainly wouldn't consider University if I were that age now! That student loan could have bought a whole Maserati, and you would have learned to be a good mechanic!

[interestrateripoff]

I certainly wouldn't consider University if I were that age now! That student loan could have bought a whole Maserati, and you would have learned to be a good mechanic!

I certainly wouldn't do it now. The debt is alarming and for most I'll bet they'll never pay it off. Still I'm sure the govt won't come after your house to clear of what you owe...

[Quicken]

I certainly wouldn't do it now. The debt is alarming and for most I'll bet they'll never pay it off. Still I'm sure the govt won't come after your house to clear of what you owe...

Ha! Fat chance of the current crop of students buying houses at bubble prices with their extra unofficial income tax. Crash ahoy!

[Quicken]

There's an e-petition worth signing here: Stop the Sale of Student Loans.

It's doing fairly well (13k+ atm), and was given an official response after topping 10k.

The 2011 White Paper, “Students at the Heart of the System”, set out that the Government would continue the work of the previous Government in exploring the feasibility of monetising the Income Contingent Repayment (ICR) loan book.

Students at the heart of the debt system, yes.

This is consistent with a wider Government programme of maximising the value of any assets in the interest of the taxpayer, and we recognise that the private sector has a part to play in this. An asset sale would contribute to a reduction in Public Sector Net Debt.

It would also contribute to a reduction in Public Sector Revenue, but let's not worry about the long term, eh? It also won't reduce the net debt very much if the post office sell-off is anything to go by. Fire sale anyone?

The Government has appointed financial advisers to prepare for a sale of ICR loans taken out before September 2012 (also known as “pre-Browne ICR loans”). At present we are at the pre-sale feasibility phase and no decision to proceed has been made.

Any future sale would need to provide value for money for the taxpayer and ensure equal protection for affected borrowers. The Sale of Student Loans Act 2008 places a requirement on Government to ensure that borrowers whose loans have been sold are not in a worse position than would have been the case had the loans not been sold.

That actually sounds somewhat reassuring. I will go and look up that act.

The Government has not made any changes to the terms of interest rates charged to borrowers with pre-Browne loans. We have also made clear that the method of determining interest rates for borrowers who took out pre-2012 ICR loans will not be changed by this Government, irrespective of whether a sale of the loans is taken forward.

Therefore, if the Government decides to proceed with a sale of pre-2012 ICR loans, the interest rate charged to borrowers will remain at RPI or base rate +1%, whichever is lower.

Hmmm.... no changes by this government. It's an offical denial at least.

For clarity, I had pre-98 loans and paid them off years ago. I just hate how the young are being screwed by the political system of 21st century britain.

Q

[erat_forte]

I had an old pre-1998 student loan which was in the first batch sold to Thesis Servicing/Link Financial several years ago. I got so fed up with dealing with Thesis Servicing that in the end I took out a 24 month 0% credit card and settled my balance with Thesis using that, paying as much off the card each month as I possibly could to clear it before the 0% period ended. Fortunately one (the only?) advantage of the debt being with Thesis is that they don't charge a fee for paying by credit card, whereas the Student Loans Company themselves do.

In doing so I lost the ability to defer repayments, and certain other legal advantages of a 'proper' student loan, but I thought it was worth it not to have to deal with Thesis any more, and it was nice to think that my settlement cost them a hefty credit card processing fee, and deprived them of a couple of years worth of interest.

I still have a pre 1995 student loan, have not paid off a penny (defer every year). As far as I was aware it was still with the Student Loan Company, I had not heard about them being sold to Thesis Servicing. What was the problem with Thesis?

I am expecting to manage my affairs to stay below the repayment threshold for another 12 years so it can be written off - I was going to say "hoping" but actually it's looking more and more like I dont have to make much effort these days to keep my income low!

[porca misèria]

Few days ago, met up with a young family member who graduated this year (after four years).

It seems that despite all the hype, he actually got a more generous financial package than I did a generation earlier. Yes, he had to pay that £3k/year in fees, but with £9k/year in grants and bursaries, he had plenty left over to live on.

With the rules having changed again, I'll have to see if I can have the same conversation with his little brother, who is a current student.

I don't know what the criteria are for those grants and bursaries, but clearly some of today's young folks have still got a better deal even in higher education than the 'boomers'.

[Bora Horza]

... but with £9k/year in grants and bursaries, he had plenty left over to live on.

A large part of that would be the Maintenance Loan, so he will be repaying it back plus interest, when he is working.

[Quicken]

Few days ago, met up with a young family member who graduated this year (after four years).

It seems that despite all the hype, he actually got a more generous financial package than I did a generation earlier. Yes, he had to pay that £3k/year in fees, but with £9k/year in grants and bursaries, he had plenty left over to live on.

With the rules having changed again, I'll have to see if I can have the same conversation with his little brother, who is a current student.

I don't know what the criteria are for those grants and bursaries, but clearly some of today's young folks have still got a better deal even in higher education than the 'boomers'.

Here is a typical projection of lifetime debt for a current student (more here):

It's a (new) graduate tax in all but name.

[Hectors House]

The one thing I don't understand is with the Students Loan Company the debt is written off after a certain amount of time with tax payers money, if that debt is sold on then surely the full debt becomes payable to buyer of the loan?

Or are private businesses being given tax payers money to offset their losses?

Something doesn't seem right, unless the government is underwriting the write off then surely the debt has to be paid in full?