UK student loans are administered by a wholly government-owned private company that is technically insolvent and cannot guarantee or compel repayment. Yet Jeremy Corbyn is now back-pedalling over Labour’s promise to abolish university tuition fees, when it could abolish student loans, past, present and future, with a phone call and a pen. 

Illustration by Rachael Bolton

The Labour Surge of 2017 was heavily attributed to Jeremy Corbyn’s apparent commitment to abolish highly unpopular university tuition fees for English and Welsh students. Young people, it was proclaimed, are the future, and Labour had successfully engaged them in large numbers for the first time in a generation.

During the election Corbyn said “I don’t see why those that had the historical misfortune to be at university during the £9,000 period should be burdened excessively compared to those that went before or those that come after. I will deal with it,”.

So Corbyn’s recent back-pedalling and fudging over what appears to be an open goal against the Conservatives seems suicidal for a man currently 4/1 on to be the next British Prime Minister. Particularly when the source of confusion seems to be a fundamental misunderstanding of how the Student Loans Company – and in turn UK finances – actually operate. This is a debate Labour simply do not need to have. It is damaging the perception of Corbyn as honest and trustworthy to a generation already shafted by Nick Clegg.

Student loans in the UK are administered via the Student Loans Company Ltd (SLC). This is a wholly government-owned private company, whose annual accounts are published at Companies House alongside all the others. Usually, loans are considered an asset on the books of any lending institution. In simple terms, “Assets” are the value of the loan book, and “Liabilities” are money that firm owes to others. According to newspaper headlines, the SLC should have “£100bn” in loan assets. However when you peruse the SLC accounts you’ll immediately notice two things:

  • There are no loan assets where they ought to be on the company balance sheet.
  • The company has negative equity to the tune of £21 million: its liabilities are higher than its assets. In other words, it is technically insolvent.

It turns out that student loans are such an artificial concept that they cannot be recognised, under international accounting standards, as assets of the firm that issues them. They are fake loans, a fiction, an accounting sleight of hand.

The peculiar nature of student loans means the SLC simply cannot guarantee or compel repayment in the way a private loan company can. Regular private debt is neither dependent upon income before repayments are triggered, nor is it written off after 30 years. Any normal lending operation would be closed down if its accounts looked anything like this. But the SLC gets away with it because it is in permanent receipt of government ‘grant in aid’.

In fact, HM Treasury is still funding universities as it always has done, because the SLC isn’t quite the nice little earner it was intended to be on creation. HM Treasury may route the ‘grant in aid’ money via the Department of Education and the SLC, but it is still at heart good old fashioned government spending. That “£100bn” of outstanding fake loans? The vast majority will never be paid back in full. Many will not even cover the initial nominal amount.

This is because of the way student loans are repaid. In essence, student loan repayments are debited at income source, monthly, at a rate of 9% on earnings above £21,000 per annum. If this sounds rather like Income Tax, then that’s because it is. Student loan repayments are indistinguishable from Income Tax for practical purposes. But unlike Income Tax, student loans are written off after 30 years. So, a student who borrows heavily and does not meet their “full” earning potential is unlikely to pay enough back before the debt is written off.

A Labour government could abolish student loans, past, present and future, with a phone call and a pen. It’s largely just a matter of putting the already insolvent SLC out of its misery via the administration process, and absorbing the 2,825 employees back into the Department of Education. Student loans are just a convoluted way of keeping a list of people the government would like to tax a bit more at some point, possibly. A graduate tax in all but name. The recent Election proved abolishing student fees and debt was hugely popular with the very people Labour need to win power – remember that a University degree is a requirement for most professional-level public sector jobs. The policy would be a moderate tax cut to the educated middle-class, whose spending will be needed to bolster the economy post-Brexit. Politically, it can be painted as a reward for endeavor and virtue, rather than the usual Tory-tax cuts for winners in the property casino.

Whatever Corbyn thought he was promising, abolishing all student debt is the correct thing to do. It makes economic, political and moral sense, and will help make him the next British Prime Minister.

Neil Wilson

Neil Wilson

Neil Wilson is the editor of Modern Money Matters and an expert in finance and information systems. He is an Engineer, not an economist, and therefore has to make things work in the messy old real world that has actual people in it.

After more than 20 years in the IT industry, Neil has learned the hard way that systems rarely follow the manual. Moving from network crashes to financial crashes, Neil was intrigued as to whether the economy could be fixed with a reboot - which lead him to Modern Monetary Theory (MMT).

Neil has become one of the UK’s leading writers on MMT and its implications. His blog “Modern Money Matters” challenges the high-priesthood of Important Grey Men who refer to people as “resources”, and who believe debt is bad for government and good for you. Neil dreams of a world where everyone who wants a living wage job can find one next to their home, friends and family.

Getting to know Neil:

- How do you spend your days?

Hopefully making a small part of the world run smoother than it did yesterday.

I do to business and information systems what Formula 1 mechanics do to the cars - continual improve them and fix them when they're broken.

- What in your answer to Q1 is especially important to you and why?

Doing more with what we have is vital to progress. I look to add to progress in my small way.

- What drove you to focus on economics? Was there a particular moment you can remember that led you to this field?

The 2008 Financial Collapse happened and it became clear that the economy was broken and ineffective.

- What drives you professionally?

I don't like to see things that are broken or ineffective. I want to sort them out.

- In your opinion what are the three biggest problems facing the developed and developing world?

Increasing income inequality, the breakdown of democracy and lack of accountability threaten the future peace and prosperity of all our societies.

- If you hadn’t become...not an economist, what would you have done?

Logically that would mean I would have to be an economist - which is an appalling thought. At that point I would have had to visit Japan, the place where economic theories go to die, and wandered into a forest with a sharp knife.

- If you look at recent history, can you identify a turning-point that explains how we come to face the peculiar challenges of today?

In 2008, billions of pounds were summoned up to save corrupt financial institutions, and yet now we are told there is no "magic money tree".

We all now know there is a man behind the curtain. We are no longer in fear of the Great and Powerful Wizard of Oz.

- What are the lessons we failed to learn during and since the 2008 crisis?

This is best answered by Michal Kalecki in his essay "Political Aspects of Full Employment" ... published in 1943.

"Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence.If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment).This gives
the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully
avoided because it would cause an economic crisis.

But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness.
Hence budget deficits necessary to carry out government intervention must be regarded as perilous.

The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence."

There is a reason episodes of Yes Minister never seem to date...

- Name one measure we might implement immediately to improve the situation.

Stop lying to the public about the Magic Money Tree. It's about the allocation of resources, not money. Money is just a tool to move stuff
around. Nobody has ever had 'inflation' written down as their cause of death. Malnutrition and Exposure: yes, Inflation: no.

- If you were a President / Prime Minister what would your first three pieces of policy be?

Job Guarantee
Guaranteed Jobs
Jobs for All

- What was your biggest & / or your most recent mistake?

Assuming that Macroeconomic textbooks were scientific works, not religious texts guarded by a loyal priesthood.

- You are stuck in a ski lift for twenty four hours and you can have one person (living or dead) with you. Who will it be?

The dead person - they're exceptionally good listeners and never interrupt.

- Name the book that changed you.

Full Employment in a Free Society by Beveridge.It was written in 1944 regarding the unemployment crisis of the 1930s and in response to
the full employment enjoyed in the Second World War.The questions raised in the book are still to be answered 70 years later.

- What would you do differently if you were to start all over again?

I think I'd answer these questions in pretty much the same way.

- Give our readers, members and subscribers a piece of advice that has served you well.

Very little in life is under oath. But the Wayback machine lives forever.

- What is your main anxiety where you and / or your family are concerned?

We now face a world where our children can expect poorer housing, education and health outcomes than their parents or grandparents.

No-one in good conscience can hand over the world to the next generation, knowing we have made their lives worse, taken away privileges and blocked the opportunities that we enjoyed.

- What gives you hope for humanity?

That there are people out there who have actually read this far.
Neil Wilson

2 thoughts on “The Great Student Loan Disappearing Trick: Fake News About Fake Loans

  1. This is a really interesting piece – and I totally see that student loans are ‘fake loans/assets’ in the way described so clearly here.

    But how do you explain the government announcement of sales of the SLC loan book earlier this year? How can they sell assets of no value whatsoever, loan books that don’t exist…..Is it pure ‘fake news’, or did they in fact sell off the loan book, and that’s why there isn’t one showing as an asset in their accounts any more?

  2. How do they sell off Gilts that similarly didn’t exist up to the point of sale?

    Government just creates the security out of thin air at the time it is sold to the private sector. It’s just a transferable, marketable welfare payment with certain conditions – just like a Gilt.

    The announcement in February was only about the loan book prior to 2012. The effect is to parcel up the additional income tax from a certain set of taxpayers and sell that income stream to a buyer. So just the same as a Gilt, but with further nominal restrictions. HMRC continue to deduct the additional tax and government then pays that out to the securities holder – just as they do with a Gilt.

    Nothing to do with loans, because the loans don’t really exist. It’s just a list of people due to pay a 9% surcharge on their Income Tax. The securities will be created as required and notionally linked to government receiving the Income Tax.

    In ‘value for money’ terms Government would likely be better off issuing a Gilt instead.

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