Loan defaults hit high

December 19, 1997

MORE students are defaulting on their loan repayments than at any time since the scheme was launched seven years ago.

Figures in the Student Loans Company's annual report for 1996-97 show defaults running at 9.3 per cent, equivalent to 34,109 students out of 368,525 former students eligible to repay their loans or who have agreed deferments.

The news comes as the government enters the final stages of its plans to sell existing loans debt to the private sector.

The 1996-97 figure exceeds the government's 6 per cent target default rate and is an increase from a default rate of 7.9 per cent for 1995-96 (20,560 loan accounts). In 1994-95, 6.7 per cent (11,296) were in default; the previous year, 5.9 per cent (or 4,985) were in default. The default rate, which is calculated every 12 months, refers to those borrowers who lack a deferment agreement and have missed two or more consecutive payments.

SLC chief executive Colin Ward said that although he was concerned about the default rate, the figure should be placed in context. Because the rates are calculated at 12-month intervals, they always take account of the latest wave of new graduates, he said. Many new graduates may miss two or more payments because they are moving around, possibly travelling abroad, and cannot be traced by the SLC.

From the second year, the default rate falls significantly as the company catches up with former students, Mr Ward said.

The existing loan debt is up for sale, and the government is considering four offers. Bids have been made by JP Morgan in conjunction with Abbey National Treasury Services; Barclays Bank in conjunction with Goldman Sachs and BZW; Deutsche Morgan Grenfell in conjunction with Sallie Mae; and NatWest Markets. A final decision is expected early next year.

The government will pay the successful company an as yet undisclosed subsidy to compensate the purchaser for defaulters and for the fact that the interest recoverable is below the market rate.

The winner of the contract could contract out the administrative functions of loan repayment to a third party. Many believe that the Student Loans Company, with its unique experience in this field, is the front-runner for this contract.

Mr Ward said: "I do not think that the default rate will cause the prospective purchasers any worries."

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