Treasury takes leaf from US system with sale of £4bn student loan book
The UK has fired the starting gun on its largest ever sale of student loans to private investors, in an effort to divest public assets and cut the national debt.
The deals will involve £4bn of loans made to about 450,000 students, which first entered repayment between 2002 and 2006. The price is expected to be lower than face value, since not all the debt will be repaid in full.
While the government has previously marketed older, mortgage-style student loans, this represents the UK’s first foray into selling debt whose repayments depend on graduates’ earnings passing a defined threshold.
The loans will be sold by securitisation, in which debt is packaged up and sold on as bonds to investors. The mechanism is commonly used to sell student debt in the US and is an alternative to so-called “whole loan” sales, where the loans are sold in the original form to a large investor. This will, in effect, create a new asset class in the UK for bonds backed by student debt.
The loans are riskier than many other forms of typically private sector debt. Repayments on the loans stop when the borrower’s income falls below a certain level, which is currently £17,495. Payments are 9 per cent of any earnings above that level, which moves with the retail price index. The interest on the loans is the lower of RPI or the base rate (0.25 per cent) plus 1 per cent.
Barclays has worked with the government since 2013 on a plan to sell the loans. Credit Suisse, Lloyds and JPMorgan are working on the first securitisation deal, which is expected to close in the second quarter.
The mooted sale was cancelled three years ago when Vince Cable, the then business secretary, decided it would not reduce government debt by as much as thought. Other countries have also considered selling off this type of student debt but then dropped the idea.
The British proposals were resurrected last year by Philip Hammond, the chancellor.
The government insists that the move will not adversely affect former students since controls will ensure the terms of their loans are not changed.
But Martin Lewis, founder of MoneySavingExpert.com, warned that even if loan terms and conditions were unchanged, the sale of the pre-1998 student loan book still caused “misery” for many former students because of the change in systems.
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