Since its inception 15 years ago the Student Loans Company (SLC) has provided over £15.8b of low-cost finance to British students. While this is an undeniable success, it is one with the potential to damage the wider financial community and the economy. The reason is simple - the SLC is unique amongst financial institutions because it cannot provide details about the repayment habits (particularly bad debts) of its borrowers to credit agencies like Experian used by the rest of the finance community.
In effect, this allows students who are behind in their repayments or who default entirely to retain a positive credit record. With the introduction of top-up fees in 2007, the amount of debt provided by the SLC is set to soar, but with bad debts already running at £160m, with 60,000 students already in arrears and another 60,000 behind in their payments, the amount of non-performing loans may also skyrocket. While 120,000 people in arrears hardly sounds cause for alarm it accounts for 4.6% of the 2.6 million debtors to the SLC and this is almost four times the amount of non-performing loans experienced by commercial banks like HSBC (whose provisions rose from 0.9% to 1% this year).
To try and improve the level of repayment the SLC has asked the DfES to change its rules so that they can share information with credit reference services. The UK government is keen to avoid repeating the experience seen in Australia when the government was recently forced to write off A$2.9b (£1.2b) of the A$10.2b (£4.37b) debt owed by former students. If the rules are changed, there may be a blip in the national statistics as financial institutions reassess the credit worthiness of the SLC’s bad debtors.
Not only may these people end up paying higher prices for credit, many may be forced into personal bankruptcy. It’s ironic that the present structure keeps the information and risk quarantined within the SLC, but if it changes the benefits of this information may actually end up having a negative impact on the wider economy. As a last resort the SLC could try to work with the Treasury using the tactic of the US government who deduct student loan repayments from Social Security benefits and directly from tax refunds.
