Banks may underwrite new loans

The Government is to float proposals for a new student loans scheme involving the banks and building societies. Department for Education and Employment officials are expected to table plans in the next few weeks which could be used as a stepping stone towards privatisation of the loans system.

But the move may be scuppered by accounting problems and demands from the banks for any scheme to be commercially attractive and offer a high level of security.

Confirmation that talks on student loans "have taken place and are continuing" between banks and building societies and the DFEE came from the Government last week.

In a written reply to a question from Bryan Davies, Labour's further and higher education spokesman, higher education minister Eric Forth said discussions were continuing. He added: "It would be premature to discuss the details now, but any announcement relating to them will be made to the House of Commons at the appropriate time."

Bank chiefs suggested this week that an announcement was imminent, as speculation grew over whether it might be included in the Queen's Speech next Wednesday or included in the Budget on November 28.

The DFEE and the Treasury are both keen to get a new system in place before next September. It has been estimated that even partial privatisation of loans would save up to Pounds 1 billion a year in public spending.

But bank officials say this could prove a Herculean task given problems already encountered in two rounds of talks which failed to produce a commercially acceptable scheme. A Midland Bank spokesman commented: "This is a high-risk venture and we see considerable potential problems in managing this book. It is not the most attractive proposition in the world."

Members of the Conservative Political Centre's national policy group on higher education are hoping ministers will be persuaded to opt for complete privatisation of loans, linking repayments to the National Insurance system to provide more security for private lenders and allowing a commercial rate of interest.

In a paper published in September, the group suggested that such a scheme could be piloted by applying it to postgraduates, who currently receive little or no support.

DFEE officials are believed to be interested in such a scheme, but have run into a technical hitch which may prevent a move to immediate full-blown privatisation.

The rules that govern Government accounting, which must conform to international regulations, make it difficult to classify student loans as private expenditure. The Government may therefore have to create a privately-backed scheme running alongside the existing one as a temporary measure, before moving to privatise the whole system.

Bryan Davies said there were serious questions to be resolved over who controlled a privatised scheme, and who determined which students qualified for loans.

"Some students may be defined by the banks as a bad risk and be excluded from the scheme. They could end up creating a two-tier system under which a large number of students are left with little support," he said.