Pounds 1m a month to service loan debt

May 15, 1998

THE Department for Education and Employment will pay millions of pounds in annual subsidy charges to the company that bought the the first chunk of student loan debt, it was confirmed this week.

Following the sale of Pounds 1.02 billion worth of loan debt in March, Treasury officials have said that the DFEE will pay debt-servicing costs in monthly instalments. It is thought that the net annual cost could reach Pounds 15 million.

This week, the loan purchaser - Finance for Higher Education Limited, formed by Greenwich NatWest, a division of NatWest Bank - got its first monthly cash instalment from the department.

Subsidies are to be paid to FFHE to compensate it for the fact that students will continue to repay their borrowing with interest fixed at the rate of inflation. Commercial lenders require rates above inflation, so the DFEE must make up the difference. In addition, the company will be compensated for those students whose incomes remain so low they never become eligible to repay and for deliberate default.

Subsidies will continue to be paid for up to 25 years until the last of the accounts under the present student loans system has been settled or cancelled. A final lump-sum subsidy will be paid to FFHE when the total level of default is known. Total gross subsidies over the life of the debt are projected to be in the region of Pounds 350 million.

FFHE was awarded the loan debt contract after a competitive bidding process. It bought Pounds 1.02 billion of an estimated Pounds 3.5 billion worth of debt amassed since 1992.

It is understood that the government had originally intended to sell Pounds 1.6 billion. It is not clear why the amount for sale was reduced. The remaining Pounds 2.5 billion of debt may be sold in one or more subsequent tranches. Tenders for the next tranche are due to be invited later this year, and FFHE is almost certain to bid.

FFHE's debt collection will be administered by Lombard Tricity Finance Ltd, a wholly owned subsidiary of the NatWest Group. Lombard Tricity has subcontracted the Student Loans Company as administrator. The SLC will continue to administer the repayment of debts for the Pounds 1.02 billion portfolio for five years.

Glasgow-based SLC will retain its role in disbursing and servicing accounts under the new loans scheme for undergraduates who start higher education courses this autumn. The main difference is that the vast majority of repayments will be collected directly by the Inland Revenue and not by the SLC.

A Treasury spokeswoman said that the amount of the second tranche of debt was still to be determined.

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