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Why not increase the interest rate on student loans?

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Why not increase the interest rate on student loans?

By Alasdair Smith

Andrew McGettigan has found out that the government is considering a retrospective increase in the interest rate paid on student loans taken out during the period before 2012.

Subsequent newspaper comment suggests that Vince Cable has ruled out the idea but the Prime Minister has not.

The objective is to make the student loan book more marketable, so that the privatisation of these loans could contribute to deficit reduction. The advice of Rothschilds has been sought in this matter but may not be disclosed to the citizens who have paid for it.

Student loan repayments are made through the income tax system. A retrospective increase in the interest rate is therefore simply an income tax increase for a particular group of graduates. I would not pay it, because I went through university at a time when the government covered all the cost of teaching. My daughters would pay the increased income tax because they have pre-2012 student loans which they have not yet repaid. Graduates of my daughters’ generation who went into high-paid jobs in the City and have already repaid all their student loans will not pay. Rich non-graduates of my daughters’ generation will not pay.

This is a selective increase in income tax of a grossly unfair kind. It is attractive to government because it is not called an increase in income tax; a fair and honest across-the-board increase in income tax would attract howls of rage from headline writers.

The sale of the student loan book will make an entirely illusory contribution to deficit reduction. Government debt will be reduced by the sale proceeds, but the income stream from debt repayments will be lost to the government; the net burden on future taxpayers will be unchanged. There’s a rearrangement of the government’s balance sheet, and a reduction in the government’s gross debt, but no change in the government’s net debt. Current public accountancy covers government non-pension liabilities but ignores most government assets.

Furthermore, as Martin Wolf has argued, the government is better placed to meet risks in the student loan book than a private purchaser, so the government will not actually get a fair price on the sale.

It is, of course, true that a retrospective increase in graduate loan obligations will make the loan book more attractive to the private sector and increase the amount that the government could expect to raise from the sale of the loan book. The Department of Business, Innovation and Skills (BIS) has no doubt paid an eye-watering fee to Rothschilds for this statement of the blindingly obvious.

The use of creative public accountancy to manage the finances of BIS is not new. As I and others have pointed out, the introduction of higher fees in 2012 makes little real contribution to government finances for many years, even decades. Still more remarkably, the BIS budget will benefit in the immediate future from the sale of the assets of the Royal Mail pension scheme, which was transformed last year into an unfunded scheme, thereby crediting its assets to the government, while keeping its liabilities off the government’s books.

A retrospective increase in graduate loan interest rates and the subsequent sale of the graduate loan book is a package which has political attractions: a highly selective increase in income tax which doesn’t look like a tax increase, a balance-sheet reorganisation which looks like a reduction in government debt, and a contribution by BIS to deficit reduction which isn’t a real contribution (except from the unfortunate targets of the tax increase).

But it is a package attractive only to politicians locked in to a failed austerity programme by the politics of the coalition.

Reposted from Alasdair Smith’s blog, with permission.

  1. I agree but believe there is an additional accounting incentive at work. In the Public Sector Net Debt headline statistic, the borrowing used to create student loans scores, but the asset created (the loans to students) is excluded as it is classified as an ‘illiquid asset’. That is, the asset doesn’t net against the liability there.

    See my comment for the Guardian:

    ps David Willetts told Parliament in Feb 2011 that £700 000 had been paid to Rothschild for the report. Since the final report on Project Hero was dated November of that year, you can add a bit more to that figure.

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