From The Guardian, Wednesday
January 23, 2008: Individual hopes of betterment through education
are often destroyed by the fear of debt, says John McDonnell, who asks why then
is the government ensuring the private sector profits from it.
Today, the government will pass the sale of student loans
bill through the House of Commons – with the support of both the Tories and the
Lib Dems. Graduates now owe £20bn to the government, and Brown is keen to cash
in on the Student Loan Book. Chunks of this debt, which will be worth £55bn
within the next 10 years, will be sold to private banks to trade on the open
|John McDonnell MP|
Upon becoming Prime Minister, Gordon Brown announced that there would be
further sales from the Student Loan Book of around one-third of the total
value. This is a far more expansive sale than those that took place in 1998 and
1999, when student loans worth an estimated £2bn were sold off.
The government will subsidise private banks to do exactly what the
government could do for less – according to the then higher education minister
the cost of privatising the loans in 1998-99 was "25 to 30% above the cost
of keeping loans in the public sector over the lifetime of the portfolio".
Why on earth would a government committed to the efficient management of public
services do this? Ministers explain that "we are transferring risk from
the public sector to the private sector".
There are two glaring problems with this rationale – the first is the ‘myth
of risk transfer’. From nuclear waste to Northern Rock and Metronet, risk is
never transferred to the private sector – the state will always be forced to
step in where there is a clear public interest. It is for this very pragmatic
reason that successive governments directly provided many core services and
undertook major projects themselves, and for the most part did so very
The second problem with this transfer is that student debt is very low risk:
it is repaid through the tax system making repayment all but unavoidable – as
is evident from the low default rate. As there is little risk to be
transferred, a fact recognised even by the opposition spokesman, the only
conclusion can be that this is ideological. It is yet another example of Gordon
Brown’s obsessive commitment to the private sector and disregard for the public
Already, the government is preparing the ground for another undervalued
sale. The government’s director of student finance and strategy told the
committee of MPs considering this bill that "there will be some transfer
of risk from the government to the private debt owners. That element of risk
will have to be given a financial value and factored into the equation".
Tranches of student debt will be packaged up as Special Purpose Vehicles
(SPVs) and sold. Until a year ago most people thought SPVs were industrial
transport – that was until the credit crunch and global banks suddenly became
aware of £100bn of virtually worthless debt – often packaged as SPVs – which
has now been written off.
There are three potential ways that a private bank could make a profit by
purchasing this debt. One is do nothing – the government’s inbuilt
undervaluation will leave one lucky bank sitting on a gradually realised
profit. The second way would be to sell on the debt at a higher price to
another bank, so the selling bank makes an immediate profit and the buyer a
long-term (smaller) profit under the first option.
The third and final option would be to increase the interest rate (currently
pegged to RPI) – a move that the government has so far ruled out, but is the
official Conservative policy. Any bank might be betting on a future government
allowing the interest rates to be set at commercial levels, and the value of
the student loan portfolio sky-rocketing.
Of course the interest rate on student debt is already above inflation,
which, as any public sector worker will tell you is 2% according to the
treasury. Yet "inflation-only" student debt currently carries an
interest rate of 4.8%. This is because the government has two inflation
measures – a lower one (CPI) for setting public sector pay, and a higher one
(RPI) for interest on student debt.
It seems amazing that while the government has found as much as £60bn,
according to some reports, to save Northern Rock, yet it needs students to find
£2.25bn every year in fees. Whilst private sector failure is responded to with
subsidies and prime ministerial interventions, individual hopes of betterment
through education are hedged, confined and often destroyed by the fear of debt
engendered by the prospect of fees and student loans.
New Labour has created a society increasingly oppressed by the worry of
personal debt. This is the brave New Labour world – subsidies for banks, but
debts for students.