David Willetts’ loan book plan: smart business or half-baked?

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Different views: the proposal for universities to buy graduates’ debt might allow fee flexibility but critics describe it as ‘half-baked’

David Willetts’ proposal for universities to buy the debt of their graduates thrust the former universities and science minister into the spotlight barely days after he had left his post.

To some Russell Group universities, the idea is to be welcomed as a route to higher tuition fees. The return for universities taking on portions of the loans system ought to be freedom on the prices they charge, in the view of some vice-chancellors.

But to critics, the idea is “half-baked” and dangerous as it could incentivise universities to avoid the kinds of subjects, or the kinds of students, likely to have lower loan repayment rates.

Mr Willetts, who discussed his long-standing interest in the idea on the BBC’s Newsnight and in a Financial Times article last week, describes his plan as a way to encourage universities to focus on the employability of their graduates. He said that the fees issue is separate from his loans idea – and told Newsnight that he had no wish to see fees rise above £9,000.

It is thought that at one stage, Mr Willetts did push for the idea of universities buying graduate debt to be included in George Osborne’s 2013 Autumn Statement, only to be persuaded that it was not yet feasible.

The Shareholder Executive, the section of the Department for Business, Innovation and Skills responsible for government-owned businesses, has explored the idea. Mr Willetts also invited the Russell Group to take soundings about the concept, it is thought.

In his eyes, the plan could actually work out better for post-1992 universities than for Russell Group institutions. This is because of the variation in loan write-off rates between universities, estimated in the calculation known as the resource accounting and budgeting (RAB) charge.

An elite institution such as the University of Oxford would have to pay a high price to the government for its graduate debt because its graduates earn well and repay a large proportion of their loans. But an institution such as the University of Bedfordshire, for example, would likely pay a lower price, as its graduates earn lower salaries overall than Oxford graduates and thus repay less of their loans.

So, according to this hypothesis, Bedfordshire would be best placed to turn a profit. If after buying the graduate debt from the government it was able to produce improvements in employability among its graduates, more money than originally estimated would flow back in repayments.

Sector urged to share the load

Ryan Shorthouse, who recommended a similar scheme to Mr Willetts in a 2010 paper for the Social Market Foundation thinktank, said: “Universities themselves should and can play a larger role in funding, especially in ensuring that the government’s RAB charge is sustainable. Willetts’ idea is one clever way of doing this.”

Mr Shorthouse, formerly a researcher to Mr Willetts in opposition and now director of the Tory modernising group Bright Blue, added that the idea “reduces the fiscal burden, releases additional resource for universities, and ensures institutions take on more risk for what they charge”.

One of the key contexts for the idea is the government’s plan to sell the student loan book to banks or pension funds, which it has pursued with the aim of improving the appearance of the public finances. This plan has run into problems – an internal government report said that big subsidies would be required to tempt private buyers, and the Liberal Democrats said recently that they would not allow any sale.

Mr Willetts’ feeling is that his idea would be a good option for the Conservative manifesto at the next election. In theory, it could offer another means of pursuing the loan book sale while also giving universities those supposed incentives to improve graduate employability.

Institution-specific data lacking

One of the sticking points in the Willetts scheme is that there is no RAB estimate on loans for individual universities as yet, so there would be no way to price the sale of loans to universities. But the former minister has taken close interest in a research project to find graduate earnings by course and institution. This study is being undertaken independent of the government by Anna Vignoles, professor of education at the University of Cambridge; Neil Shephard, professor of economics and of statistics at Harvard University; and Lorraine Dearden, director of the education sector at the Institute for Fiscal Studies.

Professor Vignoles said that the work would not provide estimates of individual university RAB charges. “However, it will provide one element of what would be needed to calculate an individual university RAB charge. In other words, we will provide information on graduates’ earnings and differences in graduates’ earnings by institution,” she said.

Discussing the Willetts scheme, Wendy Piatt, director general of the Russell Group, said there “may be some advantages” in selling the loan book in separate “tranches” as student repayment rates vary so greatly across the sector – with Russell Group graduates earning higher salaries on average.

“But without knowing the detail of what is proposed, it is not possible to say whether a particular scheme would be attractive to Russell Group universities,” she said.

Critics detect further problems. Bahram Bekhradnia, president of the Higher Education Policy Institute, called the plan “half-baked” and said the rationale of improving graduate employability was “ludicrous, and possibly damaging if it incentivises [universities] to pull out of subjects with poorer employment records and to shun students (women, students from poorer backgrounds, disabled students) with less good employment prospects”.

He also pointed out that “unless universities are prepared to take greater risks than private bodies like banks, which presumably we should not encourage, then they will not be any more prepared than private bodies to buy the loan book without the same deep discounts”.

Deep pockets required

There are other potential problems. The sums of money required to buy the debt are huge by university standards. Although it is thought that the plan considered by BIS would see the government lend universities up to 90 per cent of the money needed to buy their graduate debt, institutions might still need to work with a bank or pension fund to finance the purchase of the other 10 per cent. When the money came in from graduates, the university would then have to pay back the money it owed to the government before taking any reward for itself – a complex flow of money.

So have financial institutions shown any interest in the plan? Mr Willetts is known to have met Santander in 2011 to discuss student loans – but there has hardly been a stampede of interest since.

Andrew McGettigan, author of The Great University Gamble: Money, Markets and the Future of Higher Education, said universities would be interested in the scheme only as a “quid pro quo” for raising fees, rather than being attracted by the prospect of taking on long-term loans risk “which the government isn’t prepared to take”.

If that is the case, then it leaves the Willetts plan in an even more uncertain place.

john.morgan@tsleducation.com