The Government are to bundle up the outstanding student debt and sell it to pension and hedge funds.
Simple message to kids, if you love your parents, pay your debt; if you want to screw them-don’t.
Remember kids, your parents went debt free through Uni , think twice before declaring your Deliveroo money.
Writing off half the student loan book
The report in the FT tells us that the Treasury is looking to reduce national debt by selling the outstanding debt through financial institutions like Barclays and Rothschilds.
The debt will be doubly discounted, firstly by the cost of the process (banker’s fees etc) and secondly because much of the debt is not expected to be recovered. The FT reports one investment manager as saying
“basically it’s a distressed debt-like instrument. If 40 per cent of them didn’t pay a penny then you’ve really got to assume that that’s a trend that isn’t necessarily going away”
Our parent’s generation were bought up on the maxim “my word is my bond” and would I’m sure have been shocked to know that the Government is writing off £800m of the £3.7bn it hopes to raise from the first batch of loans its selling off next week. Infact HMT will only see £1.7bn , less than half of the book value of the loans, the balance presumably going to the City.
Mortgaging our futures
It all seems an unsavoury way of raising money for a cash-strapped Government. It’s a little “third world” and if it is part of our financial education program for young people, it should be filed under “mortgaging your future”.
What this has got to do with patient capital is anybody’s guess. If the Government wants pension and hedge funds to invest in productivity, then why sell off its future revenue streams to divert that money?
As for the performance of these loans, HMT are basically leaving it to bondholder to ensure as higher percentage of the debt is recovered as possible. That opens the door to the knee-breaking tactics of the private sector. Mental anxiety and impaired credit ratings all round.
A social contract?
I have a kid at Uni who will graduate with lots of debt and statistically he’s likely to repay it. But there will be many who go through university who will not repay their debt and who will become un-creditworthy for a generation to come.
Privatising debt collection can only lead to a greater divide between those collecting the debt (the haves who get pensions) and those who have nothing but their wages.
This is not the social contract I sign up to. As a middle-class parent, I would rather not be having arguments with my son and with his friends about him not paying my pension.
Instead, I want to talk about him investing the money into his future and into a better place for him to bring his children up.
As if pensions weren’t being screwed already
All this at a time when we are telling the people who teach our kids we cannot afford to pay them the pensions we promised.
We heard the extraordinary news this week that Oxford University is to raise money by issuing bonds through the Capital Markets to cover the shortfall in Government funding.
As one Prof put it on twitter
Oxford U will issue a 100-year AAA bond. Last year Cardiff U issued a 50-year bond at then-record-low 3.51% yield. On the other hand @TPRgovuk doubts the strength of #USS 30 year covenant. (@henryhtapper @JosephineCumbo ) https://t.co/nWqz6AE1TZ
— Michael Otsuka (@MikeOtsuka) November 28, 2017
Higher education raises the value of our equity
It’s time we broke this ridiculous cycle of debt issuance and started thinking of education as a means of building productivity and increasing the capital value of UK Plc. Securitising student debt and selling it on to pension funds is a nihilistic exercise in financial skulduggery. It will end in nothing.
We need our Universities to be properly funded out of taxation and we don’t need to be recycling public money through the City with all the costs attaching.
Most of all , we should stop thinking of the cost of education and start talking up its value. That way we might even encourage our kids to value their own finances.
Henry, not repaying your student loan does not make you in creditworthy. Probably the majority of graduates will not repay their debt, because their lifetime earnings won’t be high enough. That’s a silly system, but provided they make the payments requested of them (which in nearly all cases are collected by payroll deduction so are automatic) they will maintain a perfect credit rating and still be eligible for all the loans mortgages and credit cards you and I enjoy. Quite correctly their future lenders will take the amount of their monthly student loan repayments into account when doing the affordability checks
On the Oxford 100 year loan, this is in line with my suggestion for super long recovery period for USS
This is in every sense of the expression odious debt – no sensible pension scheme should touch it.
Selling the loans doesn’t make any sense to me. When gilts can be issued at less than RPI and revenue from the debt sold is RPI up to RPI +3. Why would you pay cost of fees etc just to massage the public debt figure?
A friend tells me that whenever you start a new Schedule E employment these days the HMRC starter form asks/requires you to confirm whether you have any unpaid student loans, even older yins like us!
Big Brother may be watching, but seems to be laying off the debt collecting to others?