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Sale of Student Loans: Regulation

Volume 622: debated on Tuesday 7 March 2017

Would those not staying for the half-hour debate on the regulation of the sale of student loans please be kind enough to leave quickly and quietly? This debate can last until 5.3 pm.

I beg to move,

That this House has considered regulation of the sale of student loans.

It is a pleasure to serve under your chairmanship, Mr Hollobone. I think this is the first time I have been involved in a debate when you have been in the Chair. On your past record, I know that you will be fair and lenient.

I have two universities in my constituency, Coventry University and the University of Warwick. I have come across Members who have attended the University of Warwick, and some who have attended Coventry University. Many students at those universities have expressed concern to me regarding the sale of student loans. It is possible that to a certain extent, the Government are heaping more debt on students that they can ill afford, against a background of further education budgets receiving a 27% cut. The education allowance and the bursaries for midwifery have been abolished. Those things raise questions about the Government’s real intentions regarding skills, whether in the national health service or manufacturing.

On 6 February, the Government announced plans to sell off student loans taken out between 2002 and 2006. Conservative Governments have previously tried to introduce that policy, but they have never been successful. Indeed, the former Business Secretary, Vince Cable, scrapped the move in 2014, saying that it would not help the aim of reducing Government debt. Why are the present Government continuing to pursue the policy? With the sale of Royal Mail, we have seen how difficult it can be to achieve value for taxpayers. It could be argued that the taxpayer lost out in past privatisations. It can be controversial if the price paid seems too low, with short-term profit put ahead of the public interest. If the student loans are expected to be profitable, why are the Government not keeping them and helping the taxpayer?

The market has little experience of buying such debt, and it will be priced conservatively. It is therefore questionable whether value for money can be achieved. It has been widely acknowledged that the Government will make a loss on the sale. The price the loans are sold for is expected to be lower than the face value. It has been described by the Financial Times economic correspondent, Martin Wolf, as “economic illiteracy”. As I said, I have two universities in my constituency, so I am very concerned about the proposal, as are the students.

My hon. Friend knows that like him, I represent two universities. He is a powerful advocate for universities and students, and he will know that students are worried about the impact on their repayments. The Government have given assurances that the repayment terms will not be affected, but there is an enormous lack of trust given that they have already retrospectively changed those terms. Does he agree that the best way for the Government to reassure students would be to use the opportunity of the Higher Education and Research Bill to give a cast-iron guarantee in law that no retrospective changes to terms of repayment will be made?

I agree with my hon. Friend. Frankly, retrospective law is always bad law. The three previous sales were of mortgage-style student loans. There have been no sales of income-contingent loans. In 2013, the Government announced that the final sale of outstanding loans had been made to Erudio Student Loans for £160 million. There have been problems with those loans and a number of complaints about their handling. Can the Minister guarantee that the loans we are discussing will not be resold to overseas buyers? What mechanisms will be put in place to protect students?

My hon. Friend knows of my interest in this issue. I have only one university in my constituency, the University of Huddersfield. My students, too, fear that the sale is an ideological fix. We heard this morning in Justice questions that the Government are selling off a young offenders prison—it is ideology that is behind this. Does he agree that we should have an independent commission to look at the issue? I have never seen a compelling economic case for the sale.

I totally agree with my hon. Friend. It is about time we stopped social engineering with education. We are getting to a point where we want some sort of commission established. I hope the Minister will announce that when he responds to the debate.

Will the personal details of students be secure? How will repayment work for European Union students? How will Welsh students be affected? The National Union of Students has consistently expressed concerns that such a sale is not in the interests of students, graduates or taxpayers. What implications will the sale have for students?

I have the University of West London in my constituency. I do not have as many universities as my hon. Friend, but has he received emails, as I have, from students who are concerned that the indecent haste to sell off the family silver will mean that students who thought they were taking out debt that could go back to the state to fund public services will now be lining the pockets of private companies? It makes no financial sense, as the Financial Times has pointed out.

My hon. Friend has put her finger on it. The Government are clearly taking an ideological approach, rather than a logical approach.

Can the Minister tell us whether there will be protection from adverse terms and conditions? In the future, we may find ourselves in a situation where the terms and conditions of student loans are designed with future buyers in mind, rather than the interests of students. The sale will not protect post-2012 students from further retrospective changes to repayment terms. That is a source of anxiety for many students and may have an impact on people’s decision to go to university. Students are questioning who is really benefiting from their education.

Selling student loans represents a dangerous precedent. It paves the way for future privatisation of the education sector—I hope my colleagues will note that. The NUS is strongly opposed to the idea that profit is made from student debt. Privatising public assets should not be done for short-term profit.

Finally, the Government never learn any lessons. The sale will do nothing to ease the burden of debt piled on students who have faced trebled tuition fees and the scrapping of maintenance grants and bursaries. The Government have already changed the terms of post-2012 loans. How will the sale instil any confidence that more changes will not be made that are detrimental to students?

Order. Mr Bailey, are you wishing to speak? Do you have the permission of the Minister and the proposer of the motion to do so?

There has been some confusion. I am delighted that you are able to speak, Mr Bailey. We must allow the Minister at least 15 minutes to reply, so if you could, temper your remarks accordingly.

Thank you, Mr Hollobone. It is a pleasure to serve under your chairmanship. I congratulate my hon. Friend the Member for Coventry South (Mr Cunningham) on securing the debate, and I thank him and the Minister for allowing me to make a short contribution.

I wanted to contribute because I was Chair of the Select Committee on Business, Innovation and Skills in 2014 when it examined the Government’s proposals on this issue, which were mooted by the then Business Secretary. The Committee’s report posed a number of questions and made a number of assertions, which are as relevant now as then. Arising at least in part from the Select Committee’s contribution to the debate, the sale was subsequently withdrawn as the then Minister said he did not consider it to be value for money. The basis on which he made that observation is probably as relevant to this sale as it was to that previous attempt.

I would like to pose a number of questions to the Minister about the sale. I understand that the structure of the sale will be different from the previous one—it is not a whole loan sale going to a single investor, but is to be packaged up in the form of bonds. That is what I read in the Financial Times of 7 February. It seems to me that that process will redistribute the risk involved in the sale from a particular company to the bondholders. In view of that, I wonder whether the discount that the Government will give will have to be even greater to attract would-be bondholders to buy.

The arguments about discounts and the potential revenue to the Government were highlighted by a number of academics, and Rothschild, prior to the previous sale. The basic problem is that the dividend stream—the revenue stream—is now determined as 0.25% plus 1%, and of course the retail prices index is running at 3% and is projected to be between 3% and 3.2% in the next three years. It will be difficult to persuade any investors to invest when the return will be less than the rate of inflation.

Rothschild said that the Government would have to give some sort of “synthetic hedge” in order to attract purchasers of the debt. The crucial underlying paradox that comes with marketing the debt underlines the value for money principles that we should be looking for in such a sale. Rothschild estimated that it would realise only £2 billion of the £12 billion that the Government projected—ironically, I see that they are projecting £12 billion on this occasion. If the calculations were done, I suspect that that may well be scaled down to the sort of figure that Rothschild projected before.

Is the Minister prepared to guarantee that the current loan terms will not be changed as a result of the loans being privatised? What are the estimates of future income that the Government would have if this loan book were not sold? What sort of discount would be offered, and what would the total revenue be if they were sold under the processes that appear to be outlined at the moment? Finally, given that Government projections can be wrong—heaven forbid—what processes will be put in place to evaluate the Government’s approach and ensure that there is value for money for the taxpayer?

It is a pleasure to serve under your chairmanship, Mr Hollobone. I congratulate the hon. Member for Coventry South (Mr Cunningham) on securing this debate. It provides a useful opportunity for me to set out the Government’s approach to the proposed sale of part of the student loan book. I would like to explain the rationale for the sale and make sure that some important points, particularly those relating to the protection of students and graduates and to our commitment to securing value for money for the taxpayer, are firmly on the record.

We are all aware that tomorrow the Chancellor of the Exchequer will make a statement to the House on the Budget. I have been re-reading the statement he made in November of last year. He set out then his commitment to fiscal responsibility, and as part of that, he was clear that public sector net debt must be falling by the end of this Parliament. It is vital that the public finances continue on the path to sustainability.

Selling assets can reduce fiscal pressures and allows the Government to invest in other policies with greater economic or social returns. The Government’s policy is to sell assets where there is no policy reason to own them and where it is value for money for the taxpayer to do so. There is clearly no policy purpose to continuing to hold the student loan book on the Government’s balance sheet.

When we provide student loans, our purpose is to ensure that people who want to pursue higher education and have the qualifications that come from it are able to do so, regardless of their personal financial situation and with no limit, now, on their numbers. As soon as a loan is issued to support a student as they study, its purpose has been met. As I will explain in more detail, the planned sale would have no impact on the position of students or graduates.

A comprehensive assessment indicates that we have a good prospect of achieving value for money. The sale process is designed to achieve the best possible price to benefit taxpayers. As additional reassurance, I must emphasise that we will only proceed with the sale if market conditions remain favourable and the final value-for-money assessment is positive.

I know there is interest in the reasons why a private investor might be interested in the student loan book. The student loan book generates a long-term, inflation-linked set of cash flows, through an efficient and established collection mechanism. Our engagement with the markets has shown that that is attractive to investors—crucially, at a price that represents value for money for the taxpayer.

Could the Minister tell us who the Department has been consulting—which experts, City firms or organisations have been giving the advice that this is a viable enterprise?

There has been a process of engagement with the market, which has been conducted on behalf of the Department by a number of financial advisers, including Barclays and Rothschild among others. Our engagement has shown us that this is attractive to investors at a price that represents value for money for the taxpayer.

The private sector is willing to take on the risk and uncertainty of future repayment cash flows because it values this long-dated asset, while Government are looking to transfer that risk and generate cash for reinvestment in policies with greater economic and social returns. I hope hon. Members will therefore agree that there is a strong rationale for selling part of the student loan book. It is good financial management by the Government; it can help support policies with greater economic and social returns; and can be achieved without affecting the position of students or graduates.

Hon. Members, including the hon. Member for West Bromwich West (Mr Bailey), asked whether terms might be changed. I can tell them that investors have no rights whatever to change terms as a result of any sale process.

The Minister will understand why students find his reassurances quite weak, given his track record. Would it not be easier simply to accept the amendment to the Higher Education and Research Bill, which would embed in law a requirement to make no retrospective changes to the terms of repayment?

As I said, as a result of this privatisation process, investors will gain no right to change the terms and conditions of the student loans they hold, so students will not be impacted by the sale.

I am worried that the Minister seems reluctant to agree to the suggestion of my hon. Friend the Member for Sheffield Central (Paul Blomfield), which would assure students that the terms will not be changed in the future.

I have just given exactly those assurances. After the sale of this part of the student loan book, terms and conditions will not change as a result of any actions by the investors who go on to own them.

The sale process we have launched covers loans issued under the previous system, which operated before 2012. Specifically, the loans in scope are those issued by English local authorities only, and which entered repayment between 2002 and 2006. A loan enters repayment the April after the student leaves his or her course, so most of the loans in the scope of the sale were taken out between 1998 and 2002. Some loans taken out after that date might also be in scope if they entered repayment in 2006. Loans issued by the devolved Administrations are not in scope, and nor are loans to EU borrowers, who became eligible to apply for a student loan from an English local authority only in 2006.

Has the Minister has seen the Financial Times article from 8 February, which says that the Government are in a unique position to be the lender because they are able to monitor graduates’ earnings? How will private companies do that? The article’s headline is, “Selling off student loans makes no sense”. Does the Minister have any comments on that? That was not the Socialist Worker, but the Financial Times.

I cannot be held accountable for the views of the FT. The Government have made it clear that we will proceed with a sale only if it represents value for money. There will be a rigorous assessment, and, as per the Sale of Student Loans Act 2008 passed by the last Labour Government, the Government will be obliged to produce a report to Parliament within three months of the sale explaining the whole process. Parliament will have an opportunity to assess that point in great detail.

The sale will comprise the future repayments on the outstanding balances on a selection of these loans, which have a total face value of about £4 billion. The retention value to the Government is lower and is calculated using the standard Treasury Green Book methodology that was developed for asset sales. It also accounts for Government subsidy of the student loan system. The loans that are being sold have already been in repayment for 10 years or more, and therefore much of their original value has already been paid back to the Government.

A securitisation structure will be used for the sale to enable the Government to maximise value for money for the taxpayer. Under that structure, the loans will be sold to a new independent English-domiciled company known as the issuer, whose sole purpose is to own the loans on behalf of investors. Investors will purchase notes issued by the issuer, and the issuer will make payments on the notes using the repayments made on the underlying loans. The sale is a competitive process open to all eligible investors. Market testing reassures us that the different tranches of notes are expected to be attractive to a range of potential investors, thereby promoting an efficient market and optimal pricing.

I emphasise that the sale will not affect the position of graduates or students. Her Majesty’s Revenue and Customs and the Student Loans Company will continue to service loans in the scope of the sale on the same basis as equivalent unsold loans. As I said earlier, investors have no right to change any of the current loan arrangements or directly to contact people with student loans, including those in the scope of a sale.

I have dealt with that point.

The sale will categorically not result in private investors setting the terms or operating the collection of student loans. Furthermore, it will not alter the Government’s policies towards student finance and higher education. Under the current system of student support, whose framework has been in place since 2012, we will continue to offer a comprehensive package of financial support to eligible students. That is part of ensuring our economy works for everyone. The current system is and will remain fair and sustainable. That is why the OECD praised our student loan system and said that we are one of few countries in the world to have figured out a sustainable approach to higher education finance.

I am happy to explain where we go from here. The sale process began on 6 February and will last for several months. The final timings and the number of loans in the scope of the sale remain subject to market conditions. As announced in last year’s autumn statement, the sale is expected to be the first in a series of pre-2012 English student loan sales, targeting £12 billion of total proceeds by the end of financial year 2021. Each sale will be subject to an assessment of value for money.

I am very grateful to the hon. Member for Coventry South for giving me the opportunity to discuss the proposed sale of part of the student loan book. I am clear that it represents an opportunity for the Government to reduce fiscal pressures and invest in other policies with greater economic or social returns. I am unequivocal in my commitment that we will do it without the sale changing the position of students and graduates. I look forward to engaging with the hon. Gentleman and colleagues in this House in the coming months on this important process.

Question put and agreed to.