House of Commons - Student Loans - Business, Innovation and Skills Committee

Student Loans - Business, Innovation and Skills Committee Contents

3 PART TWO: SALES, ANNOUNCEMENTS AND BUDGETS

HISTORICAL SALE OF THE MORTGAGE-STYLE LOAN-BOOK

BACKGROUND

57. The Government categorises the student loan-book as an asset and, as such, is able to sell that asset to raise money. The Government sold part of the loan-book previously in 1998 and 1999. In November 2013, the Government announced that it had successfully sold the last of mortgage-style student loans with a book-value of £890 million to a private buyer for £160 million:

The Government has announced the sale of outstanding student loans owed by around a quarter of a million borrowers for £160 million. The sale relates to the remaining 17 per cent of mortgage-style loans taken out by students who began courses between 1990 and 1998.

At the time of the sale, the Minister stated that the primary objective was to bring in money for the Government, although he also acknowledged that the private sector may also be better placed to collect the loans:

58. The notional value of the loan-book was £890 million. The Minister told us that selling the loan-book at a £730 million discount represented value for money because the headline figure did not signify its true value:

59. Dr McGettigan, an independent academic commentator, was concerned that, despite the lower level of true value, the Government had sold future income streams at a discount to fund short-term dividends. The 1998 and 1999 sales passed a combined £2 billion of loans to the private sector.[81] Commenting on those sales, Dr McGettigan argued that the Government subsidised that purchase "in order to get in £2 billion of cash up front, effectively £3 billion in today's prices".[82] To facilitate this the Government was "prepared to lose £250 million over the long run".[83]

60. He told us that this was also the case in the 2013 sale and the Government had, again, sold a steady income stream of repayments in return for an immediate windfall. The amount that the Government would have received, however, depended on the different assessments about how much of the £890 million would ever be repaid.

61. Dr McGettigan believed that the Government's short-term ambitions had driven the sale, despite the fact that value for money would be judged in the long term:

62. When commenting on the 2013 sale, the Minister told us that "everybody came away with a good deal, and we certainly got value for money for the taxpayer".[85] This raised the question of how a private company is able to realise additional value from these hard-to-recover loans and make a profit. We asked the Minister why the Government could not have done the same. He told us that this was because of the greater expertise found in the private sector:

63. The Minister went on to tell us that the secondary benefit to the Government was that this enabled it to realise the vision for the SLC to focus solely on issuing and administering repayments for the income-contingent loans:

64. IT IS CLEAR THAT THE PRIVATE SECTOR CAN SEE A PROFIT IN COLLECTING STUDENT LOAN DEBTS THAT THE GOVERNMENT CANNOT. THESE FINDINGS REINFORCE OUR CONCLUSIONS ON THE PERFORMANCE OF THE SLC'S DEBT COLLECTION. IT ALSO LENDS WEIGHT TO THE MINISTER'S AMBITION FOR THE STUDENT LOANS COMPANY TO BE REMOVED FROM THIS ASPECT OF THE STUDENT LOAN SYSTEM FOR MORTGAGE-STYLE LOANS WHICH MAY BE EXTENDED TO THE INCOME-CONTINGENT LOANS.

65. WE RECOMMEND THAT THE DEPARTMENT OUTLINES WHAT RATE OF REPAYMENT IT WAS ACHIEVING ON THE £890 MILLION OF MORTGAGE-STYLE LOANS WHICH HAVE NOW BEEN SOLD. THIS MAY THEN BE USED AS A BENCHMARK TO CONSIDER THE FUTURE SALES OF INCOME-CONTINGENT LOANS. WE FURTHER RECOMMEND THAT THE MINISTER SETS OUT THE MINIMUM LEVEL OF PERFORMANCE HE EXPECTS OF THE SLC IN PURSUING THE INCOME-CONTINGENT LOANS BEFORE HE WOULD CONSIDER MOVING ALL DEBT COLLECTION TO THE PRIVATE SECTOR.

TERMS AND CONDITIONS

66. The National Unions of Students (NUS) believed that selling the student loans broke the deal between Government and Students:

The really important thing here is the way that people feel about where they borrow money from and who they owe money to. Particularly the compact that individuals, and students particularly, feel that they have with the state when it comes to higher education funding is really important.[88]

However, of more importance to the NUS was the fact that the terms and conditions of loans would be changed by the private sector owners. Its concerns were based on the fact that "the terms and conditions for this set of student loans are not fixed at the time that you take your loan out".[89] The NUS went on to state that "the fundamental terms and conditions could be changed by the Secretary of State without any parliamentary process and without scrutiny".[90] The wording attached to the loans confirmed this:

67. We asked the Minister why he had reserved the right to change the terms and conditions of student loans. He told us that "successive Governments have always had the power to change the loans",[92] but offered the reassurance that the selling of the loan book actually made it more unlikely that the terms would change, because they were essentially locked into the terms of the sale:

68. The Minister addressed the concerns of the NUS by saying that "the best thing they should look for is the sale of any loans, because it is pretty likely that the contracts written at the time of the sale of the loans will specify the terms".[94] It should also be noted that the press release announcing the 2013 sale clearly stated that "borrowers will remain protected and there will be no change to their terms and conditions, including the calculation of interest rates for loans".[95]

69. THE MINISTER HAS BEEN CLEAR IN HIS PUBLIC STATEMENTS THAT THE DEPARTMENT WOULD NOT CHANGE ANY OF THE TERMS AND CONDITIONS ATTACHED TO THE LOANS AS A RESULT OF ANY SALE. WHILE IT IS THE CASE THAT MINISTERS WILL RETAIN THE POWER TO CHANGE THE TERMS AND CONDITIONS, THIS IS NOT A NEW PROVISION. WE RECOMMEND THAT THERE SHOULD BE NO CHANGE IN THE TERMS AND CONDITIONS OF EXISTING STUDENT LOANS WITHOUT PARLIAMENTARY APPROVAL.

PROPOSED SALE OF THE INCOME-CONTINGENT LOAN-BOOK

70. Following the 2013 sale of the remaining mortgage-style loans, the Government announced its intention to sell a large number of the newer, income-contingent loans:

71. The Government expects to raise £12 billion over the next 5 years by selling tranches of the income-contingent loan-book.[97] However, we heard evidence that the Government may struggle to find the necessary demand for these loans in the private sector. Dr McGettigan, an independent academic commentator, believed that no private investor would buy the debt, without specific assurances from the Government on the interest rate connected to those loans. This stems from the fact that the interest paid on student loans is the lower of two benchmarks, either:

1) 'Bank Rate + one percentage point' (currently 0.5+1=1.5 per cent); or

Dr McGettigan explained that this meant the amount of interest that students had been paying recently was below the Retail Price Index (RPI) and that no private investor would ever buy an asset that paid a dividend lower than inflation.[99] Dr McGettigan believed that the Government would need to introduce a 'synthetic hedge' into the deal for it to be attractive to investors. A 'synthetic hedge' would mean that the Government would enter into a contract to pay the difference between what the investor received in interest on the loans and the level of inflation. Dr McGettigan explained that:

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72. The Government's advisors on this sale, Rothschild, agreed. When they reported to the Government in 2011, the investment bank outlined two options for the sale, with a 'cap' on interest rates or without a 'cap':

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[…]

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73. The latter estimate is far lower than the Government's ambition to raise £12 billion in tranches of loans. In order to counter this, the Department confirmed that it was looking into the feasibility of a 'synthetic hedge' to transfer inflation risk from private investors to the Government in an attempt to bolster demand for the debt. The Minister told us that this was "exactly what our advisers are looking at".[103] Michael Harrison, the Executive Director of the Shareholder Executive, elaborated that the terms would vary with each tranche of sales:

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74. When we asked the Shareholder Executive to comment on Rothschild's findings, its Executive Director told us that the research was now out-of-date but assured us that new work was underway:

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The Shareholder Executive wrote to us and confirmed that:

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75. The current position, is respect of future sales, raises two significant concerns. First, that the Government will discount the sale in order to enjoy an immediate windfall, in much the same way as it did with the mortgage-style loans. This may be economically acceptable but needs to be based on an accurate judgement on the comparative value of a steady income stream against an immediate dividend. Second, that the Government will guarantee to a private investor that if the interest received on student loans fell below inflation, it would pay the difference. This would introduce a condition to the sale that commits it, and any future Government to pay an unquantified amount of interest. The amount may be negligible but it could be substantial. It is crucial that the Government's analysis covers both of these points comprehensively so that it knows what the cost of the sale is to the taxpayer, as well as the dividend.

76. The Committee of Public Accounts sought reassurance from the Permanent Secretary for the Department that the sale of income-contingent loans would not go ahead until these issues were resolved. He was clear that "if buyers are not prepared to pay a price which is value for money for the taxpayer, the sale will not take place".[107] The Minister agreed:

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77. Despite this, we remain concerned that the assumption from the Government is that the sale will go ahead. We were drawn to the 2013 Autumn Statement when the Chancellor of the Exchequer appeared to be in no doubt that the sales would go ahead:

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78. THE GOVERNMENT APPEARS TO HAVE COMMITTED ITSELF TO THE SALE OF THE INCOME CONTINGENT LOANS BEFORE IT HAS FULLY ASSESSED THE FINANCIAL VIABILITY OF SUCH A MOVE. DEMAND FOR THESE ASSETS IS UNTESTED AND WITHOUT THE INTRODUCTION OF A SYNTHETIC HEDGE WOULD ONLY REALISE AROUND £2 BILLION OF THE £12 BILLION RETURN EXPECTED BY GOVERNMENT. WHILE DEMAND WOULD INCREASE WITH THE INTRODUCTION OF A SYNTHETIC HEDGE, THIS WOULD COME WITH AN ADDITIONAL LONG-TERM COST TO GOVERNMENT, WHICH HAS YET TO BE QUANTIFIED.

79. THE GOVERNMENT HAS TOLD US THAT IT HAS MOVED TO THE SALE PREPARATION STAGE WITH MORE UP-TO-DATE ANALYSIS UNDERWAY. THIS ANALYSIS MUST PRODUCE A SUCCINCT BUT PENETRATIVE ASSESSMENT OF THE MARKET AND WE RECOMMEND THAT IT BE DONE AS A MATTER OF URGENCY. WITHOUT SUCH AN ANALYSIS, THERE IS NO GUARANTEE THAT THE GOVERNMENT WILL MAKE ANY OF THE FINANCIAL RETURNS THAT IT CLAIMS. WE FURTHER RECOMMEND THAT IF THE GOVERNMENT PROPOSES TO INTRODUCE A 'SYNTHETIC HEDGE' OR SIMILAR IT MUST SHARE ITS SCENARIO TESTING AND SPECIFICALLY PUBLISH ITS ESTIMATE OF THE BEST-CASE AND WORST-CASE COSTING SCENARIOS FOR THIS POLICY.

LINKING THE STUDENT-LOANS TO THE REMOVAL OF THE CAP ON STUDENT NUMBERS

80. In his Autumn Statement, the Chancellor of the Exchequer announced that the removal of the student numbers cap would be financed by the sale of income-contingent student loans:

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This was summarised in the Autumn Statement supporting documentation. Using the figures from table 2.5 of the Autumn Statement, the Government has estimated that the cumulative cost of abolishing the cap on student numbers between 2013-14 and 2018-19 to be £5.55 billion:[111]TABLE 3: THE IMPACT ON CENTRAL GOVERNMENT NET CASH REQUIREMENT OF POLICY DECISIONS

Source: HM Treasury, Autumn Statement 2013, Cm 8747, December 2013, table 2.5

81. When he came before us, the Minister explained the Government's thinking:

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We asked whether any contingency planning had been done to prepare for the event that the accounting officer found that the loans would be better off in public hands.

82. The Director of Higher Education, Matthew Hilton, told us that no contingency planning had been done, but that the policy decision had been made so the funding would be found by HM Treasury:

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The Chancellor of the Exchequer appeared to disagree when he stated that "the additional outlay of loans over the forecast period will be more than financed by proceeds from the sale of the pre-reform income-contingent student loan book".[114]

83. This inconsistency from within the Government has left us unclear as to how closely these policies are linked. The Minister wrote to us after he gave evidence and said that "the announcement on removing the cap on student numbers is fully funded".[115] He explained:

all are fully funded as part of the Autumn Statement announcement

· Grants such as HEFCE teaching grant and maintenance grants for student support

· Outlay of loans to students

· The RAB charge[116]

84. GIVEN THAT THE CHANCELLOR OF THE EXCHEQUER HAS LINKED THE REMOVAL OF THE STUDENT NUMBERS CAP TO THE SALE OF THE INCOME-CONTINGENT LOAN-BOOK, WE SEEK CLARIFICATION FROM THE DEPARTMENT WHETHER THE REMOVAL OF THE CAP IS DEPENDENT ON THE SALE OF THE LOAN BOOK.

85. IF THE POLICY IS NOT DEPENDENT ON THE SALE, THE GOVERNMENT MUST SET OUT IN ITS RESPONSE WHERE IT WILL RAISE THE £5.55 BILLION BETWEEN NOW AND 2018-19 REQUIRED TO REMOVE THE CAP WITHOUT PUTTING AN ADDITIONAL BURDEN ON THE TAXPAYER.

PRESENTATION OF DATA

86. It is essential that Government is seen to be transparent and that it presents information around student loans in a clear and understandable way. The presentation of data on the future sale of student loans was criticised by Dr McGettigan:

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87. The Minister assured us that he "did not commit the kind of schoolboy howler that Mr McGettigan claims" but that "different elements of the calculation [were] to be found in different Autumn Statement documents".[118] The Minister conceded that it would be more helpful if all of the information was presented in a single space and has subsequently submitted that information to us:[119]TABLE 4: RELAXATION OF STUDENT NUMBER CONTROLS: IMPACT ON PUBLIC FINANCES: GRANTS FOR TEACHING AND MAINTENANCE—FUNDED BY HM TREASURY

Source: Department for Business, Innovation and Skills (SLB 0007) table 1TABLE 5: RELAXATION OF STUDENT NUMBER CONTROLS: IMPACT ON PUBLIC FINANCES: STUDENT LOANS (CASH)—COSTS OFFSET BY PLANNED LOAN-BOOK SALE

Source: Department for Business, Innovation and Skills (SLB 0007) table 2

88. THE GOVERNMENT COULD HAVE BEEN CLEARER IN THE PRESENTATION OF ITS FIGURES ON THE POLICY OF THE LOAN BOOK-SALE AND STUDENT NUMBERS. WE RECOMMEND THAT, IN FUTURE, THE GOVERNMENT CLEARLY PRESENTS THE NET FINANCIAL OUTCOME OF ANY SUCH POLICY, RATHER THAN SPREADING THE FIGURES AROUND DIFFERENT TABLES ACROSS LARGE OFFICIAL DOCUMENTS.