Selling the loan book

In all the talk of public sector debt, it’s easy to forget that the Government also has huge assets. £1,268bn of them to be precise, according to the latest Whole of Government Accounts. Ministers want to sell some of them off to raise cash to invest in infrastructure – Government has said today that it will make £20bn of asset sales between 2014 and 2020. But that’s only 1.5% of the total. It seems unlikely that the potential for sales is so small.

What’s even more surprising is that £12bn of the total is to come from the student loan book. That’s about a third of the total book.

Most readers of this blog will know that student loans are designed to lose money. It’s not a mistake and it will never be otherwise, not even in boom times. Government takes no security from the borrower before making the loan, nor does it carry out credit scoring. Repayment is based on income and amounts not paid are written off after 30 years or when the borrower dies. Estimates vary, but government will lose at least 30p on every £1 it lends.

So what’s the logic of selling the loans? On the face of it, all that government would achieve is to crystallise at the point of sale a loss which is currently spread out over the 30 year life of each loan. Asset sales ought to be targeted to bring down the deficit and debt; making asset sales that drive those numbers upwards is a strange thing to do.

One good reason to sell would be if a private sector owner can do a better job of collecting repayments than the government. However, student loan repayments are based on income and collected through the tax system. Much of the cost, like with other taxes collected by PAYE and self-assessment, sits with employers and individuals and the functions carried out by HMRC could hardly be outsourced. If we outsource student loan collection, then we may as well consider outsourcing income tax collection. Are we ready for that? I doubt it, and the likelihood is that avoidance would go up, not down, if the implicit moral and social pressure that is exerted when the state is collecting taxes (or student loans) were taken away.

Another good reason to sell would be if the private sector could fund the loans more cheaply than the government. Then it could afford to pay more than the value at which the government holds the loans. What’s the comparison at the moment? The Bank of England is offering money for the Funding for Lending (FLS) scheme at 0.75% whereas the average yield on gilt issuance in 2012-13, as reported by the government’s Debt Management Office, was 2.092%. If FLS were extended to student finance, and the low rates locked in for up to 30 years, then perhaps a deal could be done. It seems unlikely, to say the least, that Mark Carney would sign up to this.

Even if he did, what about the risk that the loans will under-perform? Managing that risk must be one of the major reasons driving the government’s ambition to sell. A private buyer would make their own assessment of the risk, the biggest determinants of which are out of their control, i.e. future earnings across a pool of graduates whom studied lots of different courses and are now in lots of different jobs. Evidence suggests that the trend will be upwards but government has already figured that into its valuation of its loans. Can government find a buyer that takes a more bullish view? Or are buyers likely to extract a risk premium and pay below the government’s valuation?

I’m not optimistic that we will know the answer soon. The latest commitment is to make these sales between 2014 and 2020. But the legislation making a sale possible was passed as long ago as 2008. That was an inauspicious year to embark on a programme to sell a new and unconventional financial instrument into the market. But, while market conditions have improved, the fundamentals of the student loans haven’t changed. They are strange and complex beasts, deliberately so. Government should hold on to them and prioritise among the 98.5% of assets that it hasn’t earmarked for sale instead.