Reflecting back over Two decades you may observe the trajectory of UK government policy concerning Education, Education & Education. The underlying theme was to promote and widen access to education, particularly Higher Education (Universities).
We have seen the abolition of Polytechnics in the 1990’s and their translation to University status. We have seen a temporary overhaul of our GCSE/A-Level system where examinations became modular (now back to old style end-of-year exams), and we have also seen easy access to Student Loans.
Although we do not disagree with the principle of furthering our children’s education, there are debatable economic side-effects concerning how we have achieved this; some will argue that our policies have exacerbated modern feudalism by shackling certain demographics with significant debt.
In this blog we shall express why Student Loans are here to stay, and why it is unlikely for their rate of interest to decline (e.g. 2018: 6.1% per annum for students in employment earning above £45,000 p.a.).
Here to Stay
We applaud our politicians when they inform us proudly they have reduced government borrowing…but "How many of us can distinguish between real government efforts to combat waste versus ‘Accounting tricks’ to reduce government borrowing?" In the 1980’s to late 1990’s privatisation and PPI were all the rage; in effect our government shifted their ‘financial obligations’ and therefore balance sheet to external third parties. A smaller balance sheet would be interpreted as an efficient government.
Student Loans were no different. Instead of our Government providing funding for the full duration of Student Loans "Can the government sell its rights, to collect Student Loans, to external investors?" The answer is Yes. This can happen and does happen. This technique of selling-off cashflow receivables (e.g. mortgages, music rights, car loans…) have been around for many years, and is an effective means of reducing Government balance sheet by transferring it to third party SPVs (special purpose vehicles) funded (and therefore owned) by Investors. Student Loan securitisation is here to stay!
Student Loan interest rates to reduce?
To attract Investors to consider taking the Student Loans away from our Government, the Student Loan book must be 'investable' by Investors; the Expected Returns (%) must look attractive. Given, some Students may default and some may not earn enough to repay their loan principal with interest, there is little incentive for Investors if Student Loan interest rates came down.
Of course, our Government may sweeten the sale of Student Loan tranches by discounting more heavily the upfront sale price to Investors…but if such a give-away ever became public knowledge, the public will go bananas!
I am afraid, we will not foresee an easing of Student Loan interest rates.
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