Leaked loans plans dismissed

November 11, 1994

Economists have dismissed two models for privatising the student loans scheme being considered by the Government as financially and politically unattractive both to students and the private sector.

Details were leaked this week of a confidential Department for Education document put together by the Student Loan Working Group in February.

The leak added to the embarrassment of ministers over statistics released by the DFE on Monday, which showed that half of graduates eligible for student loan repayments are unable to make them.

The document sets out two options for privatisation. The first, called "capitalisaton", would involve the Treasury subsidising banks and credit companies to take over the loans under thecurrent no-interest repayment system.

This option would bring no change to the present repayment terms. The authors acknowledge its major disadvantage is that credit institutions would receive only the Government's portion of the interest rate while a borrower was studying or having payment deferred because of low income.

The second proposal would lead to students paying commercial rates for loans, though offering interest-free periods while they were studying or deferring payment.

Economists added their voice to condemnation of the proposals from opposition spokesmen and student union leaders.

Christopher Johnson, former chief economic adviser for Lloyds Bank and economic consultant for the National Commission on Education, said he did not think the private sector would be attracted by either option.

"A better model would be the one put forward by the NCE, which involved repayment through the tax system. The proposal was designed to make the scheme attractive to the private sector without imposing a crippling cost on students," he said.

John Barnes, lecturer in government at the London School of Economics, said the proposals were also inferior to other tax-linked schemes under consideration by ministers, such as repayment through National Insurance.

"The problem is getting a secure repayment system. If you cannot get that, then you will not get a scheme which is attractive to the private sector because of the long-term deferrment and default rates shown up by the DFE figures this week," he said.

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