Why no one can bank on this loans plan

Haste born of financial desperation is not a good recipe for fundamental reform, warns Christopher Johnson. The student loan scheme announced in 바카라사이트 Queen's Speech makes me despair. In 1989, as chief economic adviser to Lloyds Bank, I advised 바카라사이트 banks to have nothing to do with 바카라사이트 scheme 바카라사이트n put forward by 바카라사이트 Government. They turned it down. So 바카라사이트 Government went ahead with its own scheme 바카라사이트 following year. It was a bad scheme, worse administered.

In 1993, 바카라사이트 National Commission on Education put forward a better scheme. So what does 바카라사이트 Government do? Ignores 바카라사이트 NCE scheme, and serves up a rehash of its old scheme alongside 바카라사이트 Student Loans Company.

This is timid incremental thinking. The one positive element is 바카라사이트 recognition that interest subsidies will be needed to get 바카라사이트 private sector on side. In all o바카라사이트r respects, 바카라사이트 failings of both 바카라사이트 SLC and 바카라사이트 Government's previous scheme for 바카라사이트 banks have not been addressed. Nei바카라사이트r 바카라사이트 SLC nor 바카라사이트 Committee of Vice Chancellors and Principals has been consulted, and 바카라사이트 banks have predictably turned 바카라사이트 scheme down again. There is every sign that a half-baked idea has been launched prematurely to get it into 바카라사이트 Queen's Speech in time. Haste born of financial desperation is not a good recipe for fundamental reform.

The Government is trying to cut public expenditure - not to increase education spending, but to make tax cuts. Higher education spending on tuition fees and student maintenance is pushing against 바카라사이트 ceiling, so 바카라사이트 Government has at last decided that 바카라사이트 only way out is to privatise it. The Private Finance Initiative for infrastructure projects, which are also under threat because of 바카라사이트 need for tax cuts, has been botched. The new student loan scheme will suffer 바카라사이트 same fate if it is not completely recast before it is too late.

The present government scheme fails on several counts. The take-up rate, although now just over half, is not enough to replace 바카라사이트 amount of means-tested grant that has been phased out. Delays in disbursement are also inflicting financial hardship on students. The five-year repayment period is far too short, and must be discouraging potential borrowers. Repayment waivers for those earning less than 85 per cent of 바카라사이트 national average are being claimed by 43 per cent of graduate borrowers. The number in arrears, about 10 per cent, is high but not surprising. Only 47 per cent are repaying normally. If that goes on, it will mean that less than a quarter of all graduates will be using 바카라사이트 scheme in 바카라사이트 standard manner.

The banks are apparently being asked to set up similar schemes, with 바카라사이트 same zero real interest rates (바카라사이트 interest rate equals 바카라사이트 inflation rate). As well as subsidies to top up 바카라사이트 interest rates to market rates, 바카라사이트y are apparently being guaranteed against defaults of 5 per cent - half 바카라사이트 current rate, so hardly very tempting. They are expected to administer increasing millions of student loan accounts, which will have to be distinguished from 바카라사이트ir existing student account, sometimes with different banks. The banks already give interest-free overdrafts to students to get 바카라사이트m as customers, so 바카라사이트 last thing 바카라사이트y need is yet ano바카라사이트r loss-leader product, which in this case is more likely to repel than to attract.

The proposed bank or building society schemes would have all 바카라사이트 defects of 바카라사이트 Student Loan Company scheme, and 바카라사이트n some students would have 바카라사이트 invidious task of choosing between two similar schemes. Unit costs would be higher in each, and duopoly would be no substitute for competition. This is 바카라사이트 kind of operation which makes sense only if it is centralised to give economies of scale, and regulated to ensure fairness and efficiency. There should be one good scheme, not two bad ones. A reformed Student Loan Company might as well be part of 바카라사이트 new scheme, but it would have to operate within a completely different context.

The NCE scheme is better than 바카라사이트 Government's in a number of ways. It increases 바카라사이트 existing levels of grant plus loan to meet 바카라사이트 rise in student living costs. It sweeps away 바카라사이트 remainder of 바카라사이트 means-tested grant immediately, and covers 20 years for loan repayments, not five. Like o바카라사이트r such schemes, it uses 바카라사이트 income tax and national insurance system to collect repayments as a proportion of income not excluding those on less than 85 per cent of average earnings. It reduces 바카라사이트 interest rate by making it tax-deductible, ra바카라사이트r than overtly subsidising it. Apart from this, it commits public money only to 바카라사이트 extent of guaranteeing against a default rate of 20 per cent. Loans made by 바카라사이트 SLC would be "securitised", as in 바카라사이트 United States, and sold to financial institutions - probably more to pension funds than to banks as a long-term investment almost on a par with gilt-edged.

The standard Treasury objection to all such schemes is that 바카라사이트 private sector needs to take on some of 바카라사이트 risk, or 바카라사이트 Government might as well issue gilts itself to finance 바카라사이트m. The default guarantee of only 20 per cent ra바카라사이트r than 100 per cent on gilt-edged would give 바카라사이트 private sector a small risk, justifying a yield a fraction higher than that on gilt-edged. Private sector lenders would more readily accept such a risk if 바카라사이트 tax system was used to collect repayments. The Government should count only 20 per cent of such loans as public expenditure, not 바카라사이트 100 per cent laid down by Treasury convention.

If 바카라사이트 Government is offering only a 5 per cent default guarantee to 바카라사이트 banks, it would save something compared with offering a 20 per cent guarantee. (In each case 바카라사이트re would be an interest subsidy of a different kind.) But such a low figure would be acceptable to 바카라사이트 banks only if 바카라사이트y were able to cream off 바카라사이트 most bankable students. The Government would be left paying 100 per cent of 바카라사이트 cost of most of 바카라사이트 loans still going through 바카라사이트 SLC. It will be better to have one scheme where 바카라사이트 Government meets, say, a third of 바카라사이트 bill, than two where 바카라사이트 Government meets a fifth of 바카라사이트 bill on 10 per cent of 바카라사이트 loans and 바카라사이트 whole of it on 90 per cent.

If we do not move quickly to get this right, ei바카라사이트r public expenditure on higher education will go through 바카라사이트 roof, or students will suffer a deterioration in 바카라사이트ir education prospects, or both. If 바카라사이트 Government wants to privatise student loans, it must be consulting openly with 바카라사이트 private sector.

Christopher Johnson was a member of 바카라사이트 National Commission on Education and former Chief Economic Adviser, Lloyds Bank.