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 NS leader: Cold Britannia

Twenty years after the election of New Labour, for the left, it seems, things can only get worse. 

Twenty years after the election of New Labour, for the left, it seems, things can only get worse. The polls suggest a series of grim election defeats across Britain: Labour is 10 points behind the Conservatives even in Wales, putting Theresa May’s party on course to win a majority of seats there for the first time in a century. Meanwhile, in Scotland, the psephologist John Curtice expects the resurgent Tories, under the “centrist” leadership of Ruth Davidson, to gain seats while Labour struggles to cling on to its single MP.

Where did it all go wrong? In this week’s cover essay, beginning on page 26, John Harris traces the roots of Labour’s present troubles back to the scene of one of its greatest triumphs, on 1 May 1997, when it returned 418 MPs to the Commons and ended 18 years of Conservative rule. “Most pop-culture waves turn out to have been the advance party for a new mutation of capitalism, and so it proved with this one,” Mr Harris, one of the contributors to our New Times series, writes. “If Cool Britannia boiled down to anything, it was the birth of a London that by the early Noughties was becoming stupidly expensive and far too full of itself.”

Jump forward two decades and London is indeed now far too dominant in the British economy, sucking in a disproportionate number of graduates and immigrants and then expecting them to pay £4 for a milky coffee and £636,777 for an average house. Tackling the resentment caused by London’s dominance must be an urgent project for the Labour Party. It is one that Mr Corbyn and his key allies, John McDonnell, Emily Thornberry and Diane Abbott, are not well placed to do (all four are ultra-liberals who represent
London constituencies).

Labour must also find a happy relationship with patriotism, which lies beneath many of the other gripes made against Mr Corbyn: his discomfort with the institutions of the British state, his peacenik tendencies, his dislike of Nato and military alliances, his natural inclination towards transnational or foreign liberation movements, rather than seeking to evolve a popular national politics.

New Labour certainly knew how to wave the flag, even if the results made many on the left uncomfortable: on page 33, we republish our Leader from 2 May 1997, which complained about the “bulldog imagery” of Labour’s election campaign. Yet those heady weeks that followed Labour’s landslide victory were a time of optimism and renewal, when it was possible for people on the left to feel proud of their country and to celebrate its achievements, rather than just apologise for its mistakes. Today, Labour has become too reliant on misty invocations of the NHS to demonstrate that it likes or even understands the country it seeks to govern. A new patriotism, distinct from nationalism, is vital to any Labour revival.

That Tony Blair and his government have many detractors hardly needs to be said. The mistakes were grave: the catastrophic invasion of Iraq, a lax attitude to regulating the financial sector, a too-eager embrace of free-market globalisation, and the failure to impose transitional controls on immigration when eastern European states joined the EU. All contributed to the anger and disillusionment that led to the election as Labour leader of first the hapless Ed Miliband and then Jeremy Corbyn, a long-time rebel backbencher.

However, 20 years after the victory of the New Labour government, we should also acknowledge its successes, not least the minimum wage, education reform, Sure Start, a huge fall in pensioner poverty and investment in public services. Things did get better. They can do so again.

The far right halted

For once, the polls were correct. On 23 April, the centrist Emmanuel Macron triumphed in the first round of the French election with 24 per cent of the vote. The Front National’s Marine Le Pen came second with 21.3 per cent in an election in which the two main parties were routed. The two candidates will now face off on 7 May, and with the mainstream candidates of both left and right falling in behind Mr Macron, he will surely be France’s next president.

“There’s a clear distinction to be made between a political adversary and an enemy of the republic,” said Benoît Hamon, the candidate of the governing Parti Socialiste, who had strongly criticised Mr Macron during the campaign. “This is deadly serious now.” He is correct. Mr Macron may be a centrist rather than of the left but he is a democratic politician. Ms Le Pen is a borderline fascist and a victory for her would herald a dark future not just for France but for all of Europe. It is to Donald Trump’s deep shame that he appeared to endorse her on the eve of the vote.

This article first appeared in the 27 April 2017 issue of the New Statesman, Cool Britannia 20 Years On

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