Student Loans : What are they and How Much is the Government Owed

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July 17th 2019
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Student Loans : What are they and How Much is the Government Owed

The Government is selling off the student loan book. We look into the current situation.

There are three types of student loan. In 1990 the first student loans were introduced for higher education. These were loans like other finance loans in that they had fixed repayment terms. This system was overhauled in September 1998 with income-contingent loans. These 'Plan One' loans would be linked to the borrowers' income and went from only maintenance loans, being taken out to help with living costs, to including tuition fees from 2006.

In September 2012, the 'Plan Two' loans were introduced in another change to the loan system. These were also income-contingent but had difference many key differences, see below.

Early Loans (Pre-1998) Plan One Loans (Sept 1998-Sept 2012) Plan Two Loans (From Sept 2012)
Repayments Payments based on total amount + interest (recalculated yearly), over 60 months (less than four loans) or 84 months (more than five loans). Can defer/postpone repayments if income drops under £29,219 Gross income over £18,935 is deducted at 9 percent per year. This is 2019's threshold, but it is adjusted yearly. Gross income over £25,725 is deducted at 9 percent per year. This threshold has recently been increased from a fixed threshold for years of £21,000.
Cancellation When the borrower is 50 or 60. Exact age depends on whether borrower was above or under 40 years old when their last loan was taken out. If the loan was taken out before 2006 then it is written off at 65 years old. If the loan was taken out after 2006 then it is written off 25 years after the borrowers makes their first repayment. Loans are written off 30 years after the borrower makes their first repayment.
Interest Rate Annual Interest Rate equal to RPI. RPI is currently 2.5 percent. Interest Rate equal Bank Base Rate or RPI, whichever is lower, plus one percent. RPI is currently 2.5 percent and the bank base rate is 0.75 percent. Therefore, interest charged annual at 1.75 percent. During study period the interest is charged at RPI plus 3 percent, so currently 5.5 percent per year. Once you start working rate varies based on income, so RPI plus up to 3 percent.

As of March 2018, the total value of all 'outstanding' student loans provided is £102 billion. As of March 2017, the outstanding amount owed on pre-2012 loans only was £43 billion.

The estimate is that by 2049 £473 billion will remain outstanding. Estimates set only 55-60 percent of loans (all loan types) will be repaid in entirety.

In 2013 the government laid out plans to start a program of selling of portions of the student loan book, for loans issued pre-2012. The book was estimated to be worth £43 billion in total and the government is hoping to sell a portion to private investors by 2022 to raise £12 billion. The portions to be sold includes loans that started receiving repayments between 2002 and 2006.

In December 2017 the first sale was made. 410,000 student loans were sold for £1.7 billion to private investors. There were 1.2 million individual loans in total and they first started receiving repayments between 2002 and 2006 and would be worth £3.5 billion is repaid up to 2052. The sale comes out 48 pence in the pound which is higher than if the government had kept the loans considering the loans had a 65-70 percent repayment rate.

Student loans that are sold are purely on the asset value and administration, collection and setting of rates will continue as pre-sale, by the government. The Student Loan Company are still responsible for the collection of repayments.

The second sale was completed in December 2018. Around 370,000 plan one student loans, 1.3 million loans individual loans, that first started receiving repayments between 2007 and 2009 were sold. Total proceeds of the sale were £1.9 billion.

The two sales highlighted the following characteristics of student loans:

Sale One Sale Two
Average Borrower Age 37 34
Average Balance £8,626 £10,504
Average Repayment Per Year £885 £1,049
Non-Repayers ~ 40 percent ~ 29 percent
Borrowers consistently earning above threshold ~ 49 percent ~ 59 percent
Years Left to Cancellation/Write-off 28 years 31 years
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