Tuesday , September 19 2017

Selling off student loans makes next to no sense

student loan

The UK government has decided to sell a part of its student loan book. At first glance, this proposed sale cannot possibly meet the “value for money” test the government has set for itself. At second glance, the photograph is a bit more complex but the same conclusion arises. The move marks no sense, excluding as a significance of a Treasury instructions that themselves mark little sense.

The student finances in question were transacted among 2002 and 2006. The surface value of the initial tranche is £4bn. But this sale is to be the first of a four-yr programme of sales of loans issued before 2012. The total earnings are expected to be £12bn by the end of financial year 2020-21. The important feature of these loans is that repayments are on an income-contingent basis. The offered sale would not affect the terms or the management of the scheme. Indeed, from an administrative point of view, the decision to sell the loans rises only one issue: it will mark it for more difficult to change the terms in future. Once shareholders have bought securities (in this case in a complex securitization of the underlying properties), a change in terms would amount to a violation the of agreement. This might be an important constraint, since future governments might be make some changes.

The purpose of these loans was to fulfil a core function of government. This is Tobe like medicine for the defects of markets in the finance of human investment. The government is in an ideal condition to deal with this, because it has an exclusive ability to observer incomes of graduates, enforce payment and bear the risks.

Given that the government continues to organize the loan program me, what is the advantage of marketing any of the credits? The answers given are that “selling assets decreases fiscal pressures, and gives headroom for the government to invest in other policies with great economic or social returns”. They struggle with this argument is that the government is presently able to fund the scheme at a negative real interest rate. Moreover, since it has much the lowest subsidy costs and the greatest capability to bear risk of any debtor, it is impossible to imagine that the proceeds it can obtain from sale, particularly after fees, it might be  exceed the value of the stream of prospective payments to itself. The transaction must fail any practical “value for money” test.

One can see three possible responses.

The first is that, on this basis, the government might    make investments in almost whatever. The answer is that government investments should be made in activities directly relevant to its main functions. This is the case here.

A second response is that the government has guidelines on the real discount rates to be applicable for its investments. In this case, it would be 3.5 per cent. The answer is that it is very unlikely that this is now a proper discount rate: it is too high.

A third response is that the government will not copy more, even to mark profitable investments, because of random limitations on how much debit it may carry. So reducing its debt will let it off a chosen constraint and so allow it to make more productive investments. This is what David Gauke, the chief secretary of the Assets, seems to be mean when he says that the sale will help to repair the public moneys. The answer is that selling an asset whose value, at the government’s cost of borrowing, beats its price in the market will worsen the government’s finances, not improve them.

The decision to sell the student loan book is not a huge economic issue. But it does not reveal one: the approach being taken to management of the government’s balance sheet makes pressures to make silly decisions. Change it.

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