Selling student debt to universities – a raw deal?

IF volunteer Aleksandra Blawat explains why allowing universities to share the risk on student loans will lead to greater inequality and inefficiency, leading to an even worse deal for young peoplegraduation

David Willetts, former Minister of State for Universities and Science, has made a ground-breaking suggestion that universities, rather than HM Treasury, could directly hold some of their students’ debts.

The theory behind this proposal is that it would give universities an incentive to try and ensure that their graduates earn enough to repay their debts; this could involve offering them refresher courses, helping alumni find employment and modifying their courses in order to provide students with skills more relevant to the job market.

Currently, the Student Loans Company (SLC), funded by the UK government, and HM Revenue and Customs are jointly responsible for providing student loans, which are financed by HM Treasury, and are expected to cost taxpayers about 45p for every £1 borrowed.


Critics have been quick to highlight a number of problems with Mr Willets’ proposal. Universities will be incentivised to admit students who are most likely to pay back their loan, i.e. those who are likeliest to secure highly paid jobs after graduation.

There is a significant concern that universities will discriminate against students who have lower earnings prospects, and are thus less likely to repay their loan fully. These include women, applicants from lower-income and non-traditional backgrounds, and students who apply to read courses with lower earning premiums (eg. the humanities).

This would clearly be extremely inequitable. It would also be inefficient – private and social rates of return to courses aren’t equal, and hence earnings premiums do not reflect the value of different courses to society. Social returns of education should include production externalities such as the positive effects on productivity and hence others’ wages, as well as pecuniary externalities such as crime reduction and health improvements. There is a strong likelihood that basing the courses universities offer on the private returns to a degree would result in too few socially valuable degrees that have relatively low private returns, such as social work.

Only the rich benefit?

The wealthiest universities may benefit from being allowed to buy their loan books, as they disproportionately tend to take the highest achieving students from wealthy backgrounds. Libby Hacket, chief executive of the University Alliance, points out this potential problem with the policy: “If you are from a wealthy family, do very well in your exams, go to an elite university, do very well and get a high-paid job, how much of that [success] is [a result of] added value from your degree or university and how much is just social capital?

It is unclear what the benefits of this scheme would be for universities with poorer graduate employment outcomes. It may be unfair to penalize them for producing low-earning graduates when factors beside the quality of the university play a significant role in graduate employment outcomes; for example, they might be accepting students from non-traditional backgrounds who are more likely to opt for lower-salaried local graduate work.

Student loans not an attractive investment

This policy would be an alternative to selling the student loan “book” to buyers in the private sector, an idea which the Coalition now appears to have rejected. A report commissioned by the government from Rothschild Bank asked whether student debt is attractive enough to sell off. It is not – the recommendation was to either change the terms for existing borrowers or guarantee an acceptable yield through a synthetic hedge.

Willets argues that universities would be willing to take on the debt as they have a direct influence on repayments: “the more universities improved graduate job performance, the more their financial returns would increase.” Yet how much universities can actually influence graduate employment prospects is open to debate.

The increase in the number of graduates over recent years has meant that many young people appear to be over-qualified for the jobs they are pursuing. According to the Local Government Association (LGA), 40% of 16- to 24-years-olds are failing to make the most out of their qualifications, while 424,000 are assessed as not working to their potential. The majority of these are graduates working in non-graduate jobs.

The circle that everybody involved in higher education funding is trying to square is that too many graduate-level jobs are low paid, which means that under the current system, whoever is carrying the can for student debt will have to be prepared to absorb substantial losses as so many graduates won’t ever earn enough to repay their loans in full.

The only ideas the Government has come up with so far involve trying to pass their liabilities onto others, whether that’s the private sector or the universities themselves; but how we can improve the position of graduates in the labour market is the big question that nobody is willing to talk about.