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Sale of Student Loans Bill

My Lords, I beg to move that this Bill be now read a second time. Participation in higher education in this country is at its highest level ever. This has been brought about through the hard work of all involved in the sector, increased public investment and the systematic breaking down of financial barriers to higher education. Alongside reintroduced non-repayable government grants and non-repayable bursaries from higher education institutions, we have developed a system of student loans that means that no one need be deterred on financial grounds from fulfilling their potential through higher education. Income-contingent repayment loans are now available for maintenance and tuition fees. No home full-time undergraduate studying for their first degree has to pay tuition fees as they study. Repayments are made after the borrower has left higher education and are directly linked to the individual’s earnings, with collection through payroll deduction alongside tax and national insurance. Repayments are related to the size of the pay packet, not the size of the loan. This makes them quite different from the old mortgage-style student loans that were sold in 1998 and 1999 for a total of £2 billion. The loans are not commercial loans. The low interest rate, linked to inflation, means that graduates pay back no more in real terms than they borrowed. We are rightly proud of our record of breaking down the financial barriers to education and widening participation. We are confident that participation in higher education will continue to grow and that the number and proportion of students from lower socio-economic groups will continue to rise. We have sought to support that further, with additional changes to the student finance system announced last year. But growth in participation brings an interesting challenge; as student numbers have grown, so too has the Government’s student loan book. The English income-contingent loan book was valued at £17 billion at the end of financial year 2006-07, and it is set to exceed £50 billion within 10 years. This projected growth makes it all the more important to consider carefully how best to manage this large public asset. That is what this Bill addresses. In the 2007 Budget, the Government announced their intention to begin a programme of sales of income-contingent repayment student loans. We believe that ownership of the loans would be best placed in the private sector. Transferring ownership of large parts of the loan book will reduce the risk of holding loans on the Government’s balance sheet. The Government anticipate receipts from the proposed sales during the Comprehensive Spending Review period of £6.3 billion. This is a forecast, not a commitment. We are committed to the student loans sale programme, but only if any sale represents good value for money and the market conditions are right. We have two guiding policy principles in developing this sales programme. First, there should be no adverse impact on borrowers. Terms and conditions for all loans will, as now, be governed by regulations scrutinised by Parliament. The borrowers’ experience will not alter and the collection and administration systems will be the same whether or not one’s loan has been sold. This Bill contains the provisions that we need to ensure that this enduring protection for borrowers is secured. Secondly, any transaction must yield good value for money. Ministers and departmental accounting officers alike must ensure good value for money in all that they do. This responsibility is at the forefront of our minds as we prepare the sales programme. Retaining the loans in the public accounts exposes the Government to the risks surrounding the repayment of very large amounts of money—tens of billions of pounds. The Government have made forecasts of how quickly the income-contingent repayments will be made. But by the very nature of a system that is fully sensitive to changes in each individual’s earnings over time, we cannot be certain how quickly that money will come back to the taxpayer. It is not usual for government business to remain exposed to large amounts of debt-related risk and we believe that the private sector can take on and manage those risks. Having commissioned expert advice from the financial sector, we believe that there will be an appetite in the market for assets backed by the loan repayments. All transactions in which loans are sold will be subject to a rigorous assessment that we are achieving good value for money. The assessment will ensure that the sale is competitive and takes place under the right market conditions, that potential bidders have enough information to make informed bids, and that there is a genuine transfer of risk from the Government to the purchasers. There will be a comparison made of the proceeds to be achieved from selling the loans against the value of retaining them on the Government’s books, taking account of the risks involved. We should be clear that the assessment will be a matter of judgment for the Government of the day for each proposed transaction. My honourable friend the Minister for Lifelong Learning, Further and Higher Education has already made a commitment in the other place that the Government will report to Parliament after each sale. The National Audit Office will scrutinise the sales and has already signalled that it may report to the Public Accounts Committee on this sales programme. We must bear in mind that this Bill is designed to enable a long-term programme. We expect student loan sales to become a regular feature of the student finance system. The precise way in which sales might be carried out may vary over time. Our current approach to proposed sales is different from the approach to sales made 10 years ago due to the way in which markets operate having evolved. In the same way, a Government in 10 or 20 years might well want to design sales in a different way again to secure good value for money in the markets of that time. Therefore, the Bill needs to support sales arrangements more broadly than the particular way that we are planning to conduct the initial sales. It may, however, be useful to noble Lords if I explain our current approach to the sales transaction. In making a sale, the Government would not expect any financial institution to want to own the loans on its balance sheet. Therefore, our current plans are that the loans will be securitised. This is a process by which a special purpose company, or SPV, is created to issue bonds, which purchasers can trade in the financial markets. Those bonds are backed by income received from the student loan repayments of the portfolio, not by repayment of particular individual loans. A much wider range of investors will be more interested in purchasing tradable bonds than in buying a package of loans outright, because they will know that they can sell these bonds in the markets if they want to. Structuring the loan portfolio into different bonds will attract a wide range of investors and maximise its value. Different investors will be interested in different types of bonds with different risks and return profiles. Pension funds and banks, for example, may want the relatively secure investment of AAA bonds, whereas other investors, such as fund managers, may prefer the relatively greater risks but higher returns of less secure bonds. As a result, the Government believe that there will be a keen appetite for these assets in the private sector at a price that will yield good value for money. Following a procurement competition, we recently appointed the sales arranger to prepare for the potential sales in 2008-09 for the Government on this basis and to arrange sales following the Bill’s Royal Assent. Once the loans are sold and securitised, we expect them to be sold on very rarely, if ever, because owning the loans is the central purpose of the special purpose vehicle. The Government will decide on the portfolio of loans to be sold in any given transaction. We need to be sure—this is particularly important—that the loans that we offer for sale are of a type where there is sufficient information for the market to be able to price them properly, otherwise there will be no prospect of obtaining good value for money. This might mean, for example, selecting for sale loans of a certain maturity so that borrowers will have been out of university for a sufficient period to be generally connected with the repayment system through HM Revenue and Customs. We will not be selecting on the basis of the characteristics of individual loans, such as salary levels or what subjects have been studied, and loan purchasers will have no say in which loans are available for them to buy. I give existing and future borrowers this reassurance. Purchasers of loans will not be able to charge a different rate of interest, change the income threshold for repayments or use a borrower’s personal details for any purpose other than managing the loan. Purchasers of bonds backed by the loans will have no direct relationship with borrowers, the Student Loans Company or the Government. Their interest will be solely in the income which the bonds can provide. I now turn briefly to the individual clauses of the Bill. It is not a long Bill so I shall take the time to do so. Clause 1 allows the Government to sell the loans, while retaining the power to require that purchasers administer the loans in a way that meets our requirements. Clause 2 concerns various provisions that can be included in sales contracts. Clause 3 enables onward sales and deals with provisions relating to such transactions. Clause 4 enables regulations to refer to purchasers and to continue to govern loans when they are sold. Clauses 5 and 6 enable the flows of money and information needed for the current repayment system to operate for sold loans as well as retained loans. Clause 7 is a declaratory statement explicitly confirming an existing understanding that all income-contingent student loans are exempt from the terms of the Consumer Credit Act 1974 because their characteristics differ substantially from commercial loans. Clause 8 provides powers for the Welsh Ministers, in respect of Wales, which are equivalent to those which the Bill proposes for the Secretary of State in relation to England. The last time this House considered student loans it was a matter of some controversy. By contrast, I believe that this short and mainly technical enabling Bill is quite different. Its provisions have no relation to future decisions on broader student finance policy and have no impact on how students obtain financial support for their time in higher education. Rather, it enables the Government to manage efficiently a large and growing public asset. I commend the Bill to the House. Moved, That the Bill be now read a second time.—(Baroness Morgan of Drefelin.)