On 26 March 2013 a statement was tabled announcing that the remaining publicly owned mortgage-style (MS) student loan book was to be offered for sale by the Government under the Education (Student Loans) Act 1990 as amended by the Education (Student Loans) Act 1998.
Today, the Government are announcing the completion of that sale process. The purchaser is Erudio Student Loans Ltd, backed by a consortium composed of CarVal Investors and Arrow Global Ltd. Loans issued on behalf of the Scottish Government and the Department for Employment and Learning in Northern Ireland are also included in this sale, which my Department has undertaken in conjunction with the Student Loans Company (SLC).
The sold loans will continue to be administered by the SLC until they transfer to the purchaser in a few months’ time.
MS loans were available to eligible higher education students who were enrolled between 1990 and 1998. Borrowers are required to repay in fixed monthly instalments over a set period, typically five or seven years. Interest is charged at a rate equivalent to the retail prices index. Repayments can be deferred for a year at a time if a borrower’s income is below the threshold, which is 85% of the national average earnings. From 1 September 2013 the threshold is £28,775. There will be no change to borrowers’ terms and conditions (including interest rates) as a result of the sale; these are set down in regulations and borrowers’ credit agreements.
As a result of a competitive bidding process, Erudio Student Loans Ltd has agreed to pay £160 million for the portfolio of loans. Of this, approximately £43 million will be paid on migration of administration to Erudio. The price paid is greater than the estimated value to Government of retaining the loan book. The terms of the sale transfers the financial risks associated with loan repayments to the purchaser. Any impacts on the public finances will be decided by the Office for National Statistics. However, we would expect there to be a reduction of public sector net debt (PSND). The sale is in line with wider efforts to maximise the value of Government assets.
The sale process assessed all potential bidders against a strict set of criteria, including ensuring that they would provide suitable protections for borrowers upon taking over administration of the loans. Members of the consortium have a great deal of experience managing consumer debt and a history of treating customers fairly and I am content that they are a fit and proper owner of the loan book. They will have to adhere to strict Office of Fair Trading guidance about the treatment of borrowers which includes particular protections for vulnerable borrowers and those in financial difficulty. They have also committed to adhere to best practice guidance issued by the Credit Services Association.
As envisaged in the 26 March statement, the price received is below the £890 million face value of the loans. The price paid for the loan book reflects the fact that the MS loan book is an old, closed portfolio whose value is deteriorating.
Most borrowers repaying their loans on schedule should have fully repaid by now according to the original loan terms. The vast majority of the remaining loans belong to borrowers who are earning below the deferment threshold and so at present have no obligation to repay under the terms of the loans, or who are currently not meeting their obligations under the terms of the loan agreement.
The amount the Student Loans Company (SLC) has been collecting from the portfolio has been reducing year-on-year and the private sector is better placed to maximise returns from the loan book. The SLC would require significant additional investment to increase collection rates, and even then the SLC would be unlikely to achieve the same levels of repayment as specialist private sector collectors. I therefore believe this sale represents good value for money for the taxpayer.
There were two previous sales of mortgage style loans in 1998 and 1999 which passed the majority of the performing MS loans to the private sector. The SLC has successfully ensured that 69% of the approximately 1 million borrowers retained after the previous sales have repaid in full by collecting £2.9 billion in repayments.
The sale allows the SLC to focus on its core business of supplying income contingent loans to current students and collecting repayments from these loans.
Income contingent repayment (ICR) loans, offered to students after 1998, have not been included in this sale. The Government are in the process of exploring options for the potential future sale of the ICR loan book.