The government has today (25 November 2013) announced the sale of outstanding student loans owed by around a quarter of a million borrowers for £160 million. The sale relates to the remaining 17% of mortgage style (MS) loans taken out by students who began courses between 1990 and 1998.
Erudio Student Loans was selected as the successful bidder through a competitive process. Its offer was judged to represent the best value for money for the tax payer and the price paid exceeds the estimated value to the government of retaining the loans. The private sector is thought best placed to collect the outstanding debt, allowing the Student Loans Company (SLC) to concentrate on administering newer loans.
There is no need for borrowers to take any action and their terms and conditions will not be affected by the sale. The SLC will continue to manage the book until the loans are transferred to Erudio Student Loans in a few months time.
Universities and Science Minister David Willetts said:
The sale of the remaining mortgage style student loan book represents good value for money, helping to reduce public sector net debt by £160 million. The private sector is well placed to maximise returns from the book which has a deteriorating value.
The sale will allow the Student Loans Company to focus on supplying loans to current students and collecting repayments on newer loans. Borrowers will remain protected and there will be no change to their terms and conditions, including the calculation of interest rates for loans.
Erudio Student Loans is backed by a consortium led by CarVal Investors and Arrow Global Limited who are experts in consumer debt management.
There were 2 previous sales of MS loans in 1998 and 1999 which passed £2 billion of the loans to the private sector. Approximately 1 million borrowers were retained by the SLC following the previous sales and 69% of those have fully repaid their debt. The government has already received £2.9 billion of repayments.
Of the loans sold, approximately 46% are earning below the repayment threshold; 14% of borrowers are still repaying and 40% are not repaying their loans in accordance with their terms.
Speaking on behalf of Erudio Student Loans, Stuart Lammin, Managing Director of CarVal Investors said:
CarVal Investors, along with Arrow Global, is pleased to finalise the acquisition of student loans from the Student Loans Company and the government. We look forward to working with Erudio Student Loans to service these accounts given the consortium’s long-term experience in education finance and track record for delivering a high level of service to its customers.
Erudio Student Loans will have to adhere to strict Office of Fair Trading (OFT) guidance about the treatment of borrowers which includes particular protections for vulnerable borrowers and those in financial difficulty. They have also committed to adhering to best-practice guidance issued by the Credit Services Association.
Borrowers who have taken out Income Contingent Repayment (ICR) loans after 1998 will not be affected by this sale. These accounts will continue to be managed by the SLC. The government is in the process of exploring options for the potential future sale of the ICR loan book.
Notes to editor:
Mortgage-style loans were available to eligible higher education students who were enrolled between 1990 and 1998. Borrowers are required to repay in fixed monthly instalments over a set period of 5 or 7 years. Interest is charged at a rate equivalent to the Retail Prices Index (RPI). Repayments can be deferred for a year at a time if a borrower’s income is below the threshold, which is 85% of the national average earnings. Since 1 September 2013 the threshold is £28,775.
Erudio Student Loans is backed by a consortium led by CarVal Investors and Arrow Global Limited. CarVal Investors is an investment fund manager and is 1 of the largest purchasers of consumer loans in the UK market. For further information visit, www.carvalinvestors.com. Arrow Global is 1 of Europe’s largest providers of debt purchase and receivables management solutions. It currently manages over £8 billion worth of consumer debt, by face value, in Europe. It has operated in the UK since 2005 and is listed on the London Stock Exchange. For further information, visit, www.arrowglobal.net.
As well as the Department for Business, Innovation and Skills (in respect of loans to English and Welsh borrowers), the Scottish Government and the Department for Employment and Learning in Northern Ireland are also parties to the sale in respect of loans to Scottish and Northern Irish borrowers.
As a result of a competitive bidding process; Erudio Student Loans has agreed to pay £160 million for the portfolio of loans. The terms of the sale transfers the financial risks associated with loan repayments to the purchaser. Any impacts on the public finances will be decided by the Office for National Statistics, however we would expect there to be a reduction of Public Sector Net Debt (PSND).
There were 2 previous sales of MS loans in 1998 and 1999 which passed a large proportion of MS loans to the private sector. The portfolio in this sale contains the remaining loans whose value is deteriorating with age. Most borrowers repaying their loans on schedule should have fully repaid by now according to the original loan terms. The SLC has successfully ensured that 69% of the approximately 1 million borrowers retained after previous sales have repaid in full by collecting £2.9 billion in repayments. The vast majority of the remaining loans that have now been sold belong to borrowers who are currently not meeting their obligations under the terms of the loan agreement, or who are earning below the deferment threshold and so at present have no obligation to repay under the terms of the loans.
The loans offered for sale during this process have a face value of around £890 million. For details of the sale see previous announcements.
Borrowers’ terms and conditions will not change as a result of the sale. Borrowers will continue to be able to defer repayment of their loan if they are under the income threshold provided they have previously met their obligations under the terms of the loan agreement, and similarly will still have their loans cancelled if they meet the criteria set out in legislation.
The Student Loans Company will continue to administer borrowers’ loans for the time being and borrowers’ existing arrangements for repayment will remain in place. There is no need for borrowers to take any action in relation to their loans at this time. All borrowers will be contacted within the next few months by the Student Loans Company and Erudio Student Loans to inform them of the transfer of their loans and any action they may need to take as a result.
Only mortgage style loans available to those enrolled at university between 1990 and 1998 are being included in this sale. Income contingent repayment (ICR) loans, offered to students after 1998, are not being included in this sale and will continue to be managed by the Student Loans Company. Borrowers who solely hold ICR loans, including current students, will not be affected by this sale.
The Department for Business, Innovation and Skills has been advised on the transaction by PricewaterhouseCoopers (financial adviser) and Herbert Smith Freehills (legal adviser).
The government’s economic policy objective is to achieve ‘strong, sustainable and balanced growth that is more evenly shared across the country and between industries’. It set 4 ambitions in the ‘Plan for Growth’, published at Budget 2011:
- to create the most competitive tax system in the G20
- to make the UK the best place in Europe to start, finance and grow a business
- to encourage investment and exports as a route to a more balanced economy
- to create a more educated workforce that is the most flexible in Europe
Work is underway across government to achieve these ambitions, including progress on more than 250 measures as part of the Growth Review. Developing an Industrial Strategy gives new impetus to this work by providing businesses, investors and the public with more clarity about the long-term direction in which the government wants the economy to travel.