Why you should care about the student loan fire-sale, even if you aren't a student

Danny Alexander is out to get the worst return for your investment he can.

The announcement that the student loan portfolio is going to privatised has, rightly, sparked a huge response. It is a terrible idea, which will come back to haunt future governments and current graduates.

But the worst of it isn't the effects on graduates themselves – at least, not the direct ones.

The sale of the loan portfolio doesn't mean an immediate move to a US-style system of student debt. As far as we can tell (the proposals will need to be much more fleshed out between now and 2015, when the sale is planned to happen), the debt collection will continue to happen through HMRC, and at the same rates and with mostly the same rules as now. That means it will still be wiped out when a graduate gets old enough, it will still be paid back at 8 per cent of earnings above a certain threshold, and it will still not really count as debt you should be afraid of.

But there are two key problems which graduates might face as a result of the sale.

The first is the much-feared "sweetener", a change which the government might make to the student loan deal to make it a better proposition for commercial investors. As suggested in the secret Project Hero report, uncovered by the Guardian earlier this month, one possible sweetener is to remove the cap on interest rates, thus massively increasing the potential amount graduates would have to repay. The Project Hero suggestions are that this should be retroactive, affecting every graduate with outstanding debt.

Hopefully, that plan won't be put into action. Vince Cable, the business secretary, says the suggestions has been "ruled out categorically". A promise like that doesn't carry much weight from a Liberal Democrat, sadly, but maybe this time it's one they'll actually keep.

The reason to doubt them is the second thing that graduates should be wary of: commercial pressure.

The student loan contracts are mutable enough that nearly any change can be made to them. And once they have been sold, there will be a private company with a multi-billion pound investment in maximising their return from them. Any model of government power will tell you that a policy which has concentrated benefits and dispersed costs is one which gets heavily lobbied for, and this will no different. Expect lobbying for the debt to become a lot more like it is in the US: real rates of interest, and rules which make it impossible to default on, or not pay back, student loans.

When the sale happens, in other words, the fight isn't over. It's only just begun.

And even if the private lenders who buy the debt don't act on it, there's something else to consider: it removes a key commonality of interest between the Government and graduates.

While the government owns student debt, it is in its financial interest to ensure that graduates do well. If it leaves the younger generation to languish in unemployment, it won't get its investment back. That's no longer true.

But for all the risk to students, the bigger reason why the sale of student debt is stupid is because it's bad for the country.

It is, in essence, borrowing. The government is giving up income in the future to gain a lump sum now. And that's fine! It's the sort of thing which it should have done three years ago, not two years in the future, but whatever: it's nice to see that they're finally, grudgingly, painfully slowly accepting that the foundations of their entire economic structure are riddled with holes.

Except they're not. Because in a desperate effort to make it look like they aren't completely chucking out every belief they pretended to have, the Government isn't actually going to borrow the money. Which means that rather than taking advantage of what were, until last month, some the lowest bond yields Britain had ever seen, and what remains an astonishingly low cost of borrowing… we aren't. Instead, our government is twisting itself in contortions, discussing student loan debt as though it's a pile of newspapers sat at the back of the treasury, which they mustn't be "compulsive hoarders" of, in order to sell at a discount an asset which is significantly more valuable in public hands than private. It's politically driven economic illiteracy.

And so to encourage the purchase, to eke some cash out of this shoddy deal, the government is likely to implement a "synthetic hedge". Basically, it lets them sell the student loan debt as though they'd implemented the changes to repayment rules, without actually doing it. They promise to pay the purchaser a sum equivalent to what they'd be getting if the rules had been changed, and then kick the question of how to actually pay that sum to a future government. It's cowardice dressed up as a business plan, and it's coming here in 2015.

Photomontage: Getty Images/Alex Hern

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The tale of Battersea power station shows how affordable housing is lost

Initially, the developers promised 636 affordable homes. Now, they have reduced the number to 386. 

It’s the most predictable trick in the big book of property development. A developer signs an agreement with a local council promising to provide a barely acceptable level of barely affordable housing, then slashes these commitments at the first, second and third signs of trouble. It’s happened all over the country, from Hastings to Cumbria. But it happens most often in London, and most recently of all at Battersea power station, the Thames landmark and long-time London ruin which I wrote about in my 2016 book, Up In Smoke: The Failed Dreams of Battersea Power Station. For decades, the power station was one of London’s most popular buildings but now it represents some of the most depressing aspects of the capital’s attempts at regeneration. Almost in shame, the building itself has started to disappear from view behind a curtain of ugly gold-and-glass apartments aimed squarely at the international rich. The Battersea power station development is costing around £9bn. There will be around 4,200 flats, an office for Apple and a new Tube station. But only 386 of the new flats will be considered affordable

What makes the Battersea power station development worse is the developer’s argument for why there are so few affordable homes, which runs something like this. The bottom is falling out of the luxury homes market because too many are being built, which means developers can no longer afford to build the sort of homes that people actually want. It’s yet another sign of the failure of the housing market to provide what is most needed. But it also highlights the delusion of politicians who still seem to believe that property developers are going to provide the answers to one of the most pressing problems in politics.

A Malaysian consortium acquired the power station in 2012 and initially promised to build 517 affordable units, which then rose to 636. This was pretty meagre, but with four developers having already failed to develop the site, it was enough to satisfy Wandsworth council. By the time I wrote Up In Smoke, this had been reduced back to 565 units – around 15 per cent of the total number of new flats. Now the developers want to build only 386 affordable homes – around 9 per cent of the final residential offering, which includes expensive flats bought by the likes of Sting and Bear Grylls. 

The developers say this is because of escalating costs and the technical challenges of restoring the power station – but it’s also the case that the entire Nine Elms area between Battersea and Vauxhall is experiencing a glut of similar property, which is driving down prices. They want to focus instead on paying for the new Northern Line extension that joins the power station to Kennington. The slashing of affordable housing can be done without need for a new planning application or public consultation by using a “deed of variation”. It also means Mayor Sadiq Khan can’t do much more than write to Wandsworth urging the council to reject the new scheme. There’s little chance of that. Conservative Wandsworth has been committed to a developer-led solution to the power station for three decades and in that time has perfected the art of rolling over, despite several excruciating, and occasionally hilarious, disappointments.

The Battersea power station situation also highlights the sophistry developers will use to excuse any decision. When I interviewed Rob Tincknell, the developer’s chief executive, in 2014, he boasted it was the developer’s commitment to paying for the Northern Line extension (NLE) that was allowing the already limited amount of affordable housing to be built in the first place. Without the NLE, he insisted, they would never be able to build this number of affordable units. “The important point to note is that the NLE project allows the development density in the district of Nine Elms to nearly double,” he said. “Therefore, without the NLE the density at Battersea would be about half and even if there was a higher level of affordable, say 30 per cent, it would be a percentage of a lower figure and therefore the city wouldn’t get any more affordable than they do now.”

Now the argument is reversed. Because the developer has to pay for the transport infrastructure, they can’t afford to build as much affordable housing. Smart hey?

It’s not entirely hopeless. Wandsworth may yet reject the plan, while the developers say they hope to restore the missing 250 units at the end of the build.

But I wouldn’t hold your breath.

This is a version of a blog post which originally appeared here.

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