What’s new in the Cameron Government’s ongoing effort to keep its student loan scheme out of the ditch? In an effort to find out, I turned up in Committee Room 8 in Parliament on the morning of 17 December, and watched the Business, Innovation and Skills (BIS) Select Committee hear from a panel of three witnesses about the proposed sale of the student loan book to private investors.

The context was a pair of announcements in the Chancellor of the Exchequer’s Autumn Statement (5 December 2013).  One was that the Government was likely to start selling ‘pre-Browne’ (1998-2011) student loans in 2015. The sale was projected to generate around £12 billion over five years, offsetting part of the £12 billion in new student loans that the Government must borrow annually. The second was that the Government would remove the cap on student enrolments to allow another 60,000 students to enter the system each year for the next three years (on a current undergraduate base of about 1.9 million).

At first glance, the revenue benefits of the sale appeared to be exactly cancelled by the expansion (the additional students would cost a further £2 billion a year). What did all this mean for the solvency of the Government’s higher education funding scheme, with its new dependency on student fees, loans and future incomes?


The news from the panel of witnesses was not good. The first, Toni Pearce, President of the National Union of Students, expanded on her organization’s support for more student numbers, but not by funding them with ‘yet another fire sale of the student loan book’. Pearce delivered a polite version of the NUS’s present view – an improvement on their ambiguous 2012 report, Mapping the Evidence – that ‘the current student loans system is completely unsustainable and this selling of public assets is stacking up problems for the next generation’.

The second witness was Bahram Bekhradnia, Director of the Higher Education Policy Institute (HEPI). He built on an analysis that HEPI had released the previous day. The key finding supported the NUS’s conclusion:

In assessing the ability of Government to meet the costs of the student number expansion, HEPI’s view is that it is not sustainable to rely on the sale of the student loan book to provide a means of reducing public debt. The problem remains that while the proceeds from the tranches of sales last five years, the increased numbers of students continue to add to the public debt (estimates are £2 billion per year). The loan sale proposed is based on a loan book built up over many years and it cannot be repeated as frequently as required. It has all the characteristics of a Ponzi scheme, relying on diminishing future income to make good increasing deficits.

In HEPI’s analysis, the loan scheme was falling further and further behind, and selling the loan book would do nothing to fix the underlying problem. Bekhradnia used the term ‘Ponzi scheme’ again in the hearing, which is to describe the loan scheme as a form of fraud, one that pretends to be sustainable for the sake of maintaining the continuous stream of suckers on which its solvency depends.

The third witness was Andrew McGettigan, a philosophy PhD turned higher education journalist who had recently published the most comprehensive overview of the Cameron-Willetts higher education changes, The Great University Gamble. Throughout summer and autumn 2013, McGettigan had generated a further series of warnings and revelations about the higher education budget.

One set involved unexpected BIS budget deficits that the Government would resolve by cutting scholarships, the remaining teaching grant, and, next year, the maintenance grant by £1,000 (Radical Philosophy; The Guardian).

A second warning concerned a botched calculation by BIS, which was then missed by the Treasury. On 9 December, McGettigan revealed that the Autumn Statement showed revenues from selling the loan book, but did not subtract the lost income stream for a loan book it no longer owned. He concluded that the Government’s ‘ingenious coup de théâtre of Thursday now seems closer to bad bunko gimmickry’.


A third set of revelations involved McGettigan’s analysis of a confidential review of the viability of a loan book sale. BIS had commissioned the review from the investment bank Rothschild, and the website False Economy obtained a redacted version which McGettigan’s team had managed to un-redact. The website began to post accounts of the document in June 2013, and published the Rothschild report more or less in its entirety on 18 December, along with McGettigan’s headnote.

Rothschild had endowed the sell-off with the pompous moniker ‘Project Hero’, but offered bad news about the returns from this noble endeavor. The new, post-Browne loans were too risky to be placed any time soon: their sale should be pushed out to 2020, if not beyond. As for the pre-Browne loans, they were less desirable than the Government had assumed. As a result, either the low interest-rate cap would greatly reduce the value of the loan book and the resulting proceeds, or the Government could get the expected £10-15 billion by paying investors a higher market interest to move the loans.

In other words, the Government faced an unpleasant choice. It could renege on the agreement with students to fix interest rates at a low level, and make them pay more. Or it could top up the interest rate payments to investors with a government-funded ‘synthetic hedge’, which would pay investors as though there were no interest rate cap. Either the students would pay more, or the taxpayers would pay more. These were, of course, the two parties whose cooperation had been contingent on cost stability – stability that Rothschild was saying a successful sale must liquidate.

Taken together, the revelations deepened the sense, prior to the Select Committee hearing, that BIS policy is ‘economically illiterate’, in Financial Times columnist Martin Wolf’s phrase, or based on ‘back of the envelope calculations miss[ing] basic facts about financial assets’, in McGettigan’s, or ‘fantasy funding’, in Economics Professor Alasdair Smith’s, or casually sadistic towards future generations in the ease with which it replaces pay-as-you-go taxation with debt. The unspoken question around the policy is now less, ‘When will it start to work?’ than, ‘Dumb or evil?’


How did the Select Committee face the wall of worry that their expert panel had built? The Conservative MPs made little effort to defend their party’s policy. The closest anyone came was when MP Nadhim Zahawi asked McGettigan whether the loss of £250 million on £2 billion in sales of 1990s loans wasn’t a reasonable cost of money – to which McGettigan replied no, not when the Government can itself get the same money for lower or zero interest via taxation.

The Labour MPs seemed hesitant and confused, mostly messaging their bond with the taxpayer via doubts about loan repayment security, embodied for a few minutes by the iconic fugitive Bulgarian graduate returning home with a British education for which he would bin the bill. Needless to say, this line of questioning did not burnish the image of Labour as a meaningful opposition party. A further hearing is scheduled for January, this time with Minister of Universities and Science David Willetts, who had declined to appear in December in the time slot following this expert panel.

Though I am far from an expert on Parliament’s operations, I assume, based on my experience of the hearing, that no political party will do much with the December loan book revelations. They may shrug regretfully, demand new Ministry accountants, and carry on with a bad policy because everyone has gotten used to it.

And yet none of the Cameron-Willetts changes have penciled out as promised. Perhaps the Government’s declining credibility on higher education, now being pointed out by some senior university officials, will finally provoke hearings about the effect on UK universities of the overall Cameron-Willetts policy.


It will take something like a real parliamentary debate to get at the reason why the arithmetic keeps coming out wrong. This reason is the logical incoherence of the underlying privatization policy. In administering their shock treatment of 2011—cutting 80 percent of the government teaching grant and tripling student fees—the Tories were applying two of their core post-Thatcher ideological assumptions to the sector: first, that competition always improves efficiency by lowering costs, and secondly, that markets always beat governments at serving the public interest.

The evidence to date supports neither belief. The privatization has managed the difficult inefficiency of increasing costs to students and to the public at the same time.  Competition ‘works’ in many sectors, particularly public services, through regulation and public subsidy. The costs of the overall scheme will steadily increase as the Government gives public loan support to new commercial providers (this story is well-told in Stefan Collini’s review of McGettigan’s book), and, in replacing taxes with loans, as it gives an ever-growing portion of education funds to the financial sector. The Economic and Fiscal Outlook estimates that in 2018-19, £17.4 billion in loans will be issued, and yet the government will recover only £3 billion in payments that year. Overall government student loan liabilities will hit £100 billion in 2035, which is the first year in which the programme does not run at a loss.

Abundant evidence about this Tory fallacy can be found in the United States, where competition for students has created ruinous costs that only the wealthiest private universities can support. In the US university market system, universities don’t so much sell educational services as buy students, in the phrase of one former college president (Victor E. Ferrall, Jr. chapter 4), and they lose the most money buying the students they most want – through scholarships, marketing, facilities overbuilding, and other forms of rivalrous consumption and duplication. The American for-profit sector, operating on strict competitive principles, has created the worst education for money in modern history (see the report of the U.S. Senate).

As for the second belief, that markets are the best servants of the public interest, we must skip relevant considerations of market failure, the economics of public goods, and technology’s special role in service industries and simply observe the financial outcomes: Cameron and Willetts’s market reforms threaten university access by raising its cost to students. Average graduate debt will rise to somewhat over £35,000 per student—a remarkable achievement in the history of cost shifting, since American graduate debt, after decades of the highest tuition levels on earth, is around $29,000. Universities can obviously learn from business organizations, and processes can always be improved. But there is no evidence that the public good is advanced by giving publicly subsidized loans to students to fund a pop-up Pearson or Apollo Group college rather than a less selective (and already underfunded) existing university. There is much contrary international evidence that the public good of high-quality instruction is undermined.

Though the Conservative Government has not validated its first principles, it has engineered a switch from taxation to debt, shifted liabilities from society to students, and locked in massive future borrowing on the loan scheme’s behalf. Both risk and operating costs are privatized, in the sense that they become the obligation of individual students, and yet the system requires a large, permanent public subsidy in the form of government borrowing.


This is not what the British public signed up for—this subsidy capitalism, in which the ability of the private sector to deliver superior public goods depends on unacknowledged taxpayer support. But will the British public put a stop to it?

The answer to that question depends largely on whether the university community can do three things. First, it must explain why public funding matters to public universities, where investment leads to increased quality for all and not to ever-falling costs. Second, it must show how Tory math cannot possibly support educational progress.  Third, it must propose an alternative funding scheme.

This new funding scheme might summon the ghost of progress past—the social-democratic mechanism in which a government improves both access and quality by increasing the teaching grant and capping or cutting tuition costs. But however the alternative plan is described, it will need to cut costs by cutting out the commercial intermediary now extracting a toll to pass public and student money on to faculty and staff so they can do their jobs.

The BIS hearing showed these panelists succeeding at the second task of exposing the loan scheme math. The rest of us need to make headway on the first and the third: explaining the necessity of public funding, and rebuilding it.



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