Americans aren’t the only ones dealing with a student loan debt issue. A loan for three years of university in the UK now costs £54,000. The total student debt in England is up to £76 billion in 2016 which is up from £34 billion in 2011.
One of the biggest problems for the UK is that when it comes to government loans, a borrower can walk away from payments after 30 years, regardless of the outstanding balance, which leaves taxpayers to pick up the tab. To deal with this, the British government decided to sell off outstanding student loans made before 2012 as bonds (also known as securitization) to private investors in an effort to raise about £12 billion.
The first batch of loans being put up for sale—valued at £4 billion—began repayment between 2002 and 2006, and if the sale is a success, there is a chance loans made after 2012 could become available. Yet Moody’s downgrade of these student loans as “high risk” could leave investors nervous about taking on this kind of business. There’s also concern due to issues in the U.S. where loans are offered through the federal government and the private sector. Americans currently have $1.4 trillion in student loan debt among 44 million borrowers.
Yet experts say that this new attempt at securitization will actually carry less risk. Previous attempts at securitization had problems because the private companies collecting the debt did not comply with consumer credit rules when sending notices to borrowers. This time around, this issue won’t come up since borrowers automatically begin repayment when their salary rises above a certain threshold, currently just under £17,500. Repayments are collected by U.K. tax authorities out of borrower paychecks and serviced by the government. The intention is to reduce the rate of default.
About half of the securitization structure, which will be split into five tranches, is expected to be “unrated” which implies a high level of risk. These bonds are expected to be sold at a significant discount.
Image Copyright Davide D'Amico.