Should I Be Freaked Out That the Government Is Selling Off Student Debt to Private Companies?
We spoke to Martin Lewis, finance guru, about what it means for you.
Nobody likes getting a letter from the Student Loans Company; an annual reminder that you owe around £44,000 is – like most things you get through the post – depressing. But it could be about to get even more grim. This week, the government announced that it would sell off student debt to private companies. Graduates in England who took out loans between 2002-2006 will be the first to be affected.
The government wants to sell off student debt so that it can bring in money now – and the plan is to raise £12 billion from the sale. But experts have questioned if the government will manage to get a decent price from the private sector (politicians don't have a great track record on this kind of thing). The danger is that ministers will be so desperate to sell off the debt and appeal to buyers that they'll screw over graduates in the process. This might mean retrospectively changing the threshold for repayments – something which has already affected people who took out loans after 2012, and will cost those students thousands of pounds. This is all on top of the practical things that might change if you suddenly owe money to a private company – like, for example, whether your student loan will suddenly appear on your credit report, or whether you'd still get letters from the Student Loans Company.
VICE: What does "selling off the student loan book" actually mean?
Martin Lewis: It's effectively a way for the government to bring cash in now rather than having to wait for it. The government will sell the underlying debt that is owed – so commercial companies will be the ones who gain from the money when it's being paid back. I hope, for those people who have those loans, that in practice it doesn't mean very much. I hope.
Weren't there loads of problems last time the government sold off the student loans?
There were. When they sold pre-1998 loans [which had different repayment terms to the current system] there were three main things that went wrong. The new companies changed the forms people had to fill out to defer payments [graduates used to fill out forms to confirm they weren't earning enough to start paying back]. These forms were much more intrusive and badly designed. Deferments were wrongly processed, which was a nightmare for people. There was a general feeling that Erudio, the company that bought the loans, was pushing very hard to stop deferments. The third thing was that student loans for the first time appeared on your credit file, which they'd never done before. The practical impact of this wasn't very bad, but it worried people.
Could all of that happen again?
The government is saying that student loans will not go on to people's credit files – I've got that in writing. I've had things in writing before that have been overturned, but my hope is that students won't notice any difference. Hopefully – the way they're saying this will work – is you'll continue to pay the student loans company [rather than having to pay a private company]. But until this actually happens – they haven't sold it, we don't know who the buyer is – I'm not willing to come out and say there won't be any difference. The proof of the pudding is in the eating.
There's a privacy issue here – a lot of people would say: 'I've got a relationship with the state, why has it been moved into the commercial sector?"
If student loans appear on your credit records, would this make it harder for you to get a loan or a mortgage?
I've been [told] point blank that it's not being put on credit reports. But were it to be put on credit reports, it would have more impact on your credit card and loan applications than it would on your mortgage application. Mortgages have much more detailed checks and will ask questions about your student loan anyway.
It's hard to say what the impact of a student loan would be. Anything you do with debt has pros and cons. The fact you have an outstanding debt is bad, the fact you have an outstanding credit is good, the fact you're paying back on time is good. But it's how it adds up that matters, and every lender scores you differently. What we certainly do know is that if you're not paying it off when you should be then that would definitely have an effect.
There's also a privacy issue here – a lot of people would say: "I've got a relationship with the state, why has it been moved into the commercial sector?" I think there's a real argument for that.
Could a private company suddenly start charging you more?
No, but the government might do that. What I find very worrying is the government feels it needs to appeal to the buyers of the debt. So how will they behave to make the debt more attractive?For example, the chancellor was asked a question on the retrospective hike in loan repayments [the government backtracked on its promise to raise the threshold for repayments in line with average earnings, which will cost some graduates thousands of pounds]. He said that given it was "preparing the student loan book, ultimately, for sale as an asset" the decision was unlikely to be reversed.
So the government is even less likely to protect graduates and keep its promises if it's trying to sell off the loan book?
The chancellor's argument is that the rights of students to have a fair contract and what they were promised is not as important as giving security to potential buyers of the debt. You've got to get your priorities right – and the priorities for me are students and young people, and that the political system lives up to what it promises them.
Will the sale of the student loan book definitely happen?
Yes, they've started the sale. They need to find someone who will buy it, but I'd be very surprised if this didn't go ahead. The loans made to students from 2002-06 will be the first ones to be sold. Whether they sell it or not will depend on the price they're setting and how that compares to market conditions. The issue with this debt is that many people won't repay it in full.
Should people with student loans be worried?
Practically, I hope there'll be no impact. I do think there is an impact in terms of how the government will approach loans in the future – and we've seen that with the 2012 repayment threshold. As to what you can do about it? Cross your fingers, hope it will be OK and get on with your life. But be prepared to protest if there is a practical issue, and do protest about the impact of [the retrospective hike in payments faced by] 2012 students, because that's outrageous.
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