Selling off student loans to universities: the pros and cons

Government ministers have been considering the idea of selling England's student loan book to universities.

Currently, students borrow money from the Treasury to cover university fees and living costs and only have to start paying it back when they earn more than £21,000 a year. After 30 years, any outstanding debt is written off.

Officials, who calculate that taxpayers are financing between 30p and 40p out of every £1 lent, are researching a move suggested by David Willetts, the former minister for universities, to give universities the option of buying their graduates' debt.

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Writing in the Financial Times, Willetts says the move would give universities a "direct financial interest in ensuring their graduates secure well-paid jobs that enable them to pay back more of their debt sooner".

He believes universities would do more to keep in touch with graduates, offering extra help to those without a job and refresher courses to boost their skills and earnings.

Today's Daily Telegraph editorial gives Willetts "top marks" for trying to find a solution to the problem, but warns that there might be fewer incentives for universities to offer courses without an obvious earning potential.

"This would be no bad thing if it means the decline of vanity degrees of the 'soap opera studies' variety," it says. "But it would be tragic if it meant fewer humanities courses being offered by institutions of quality."

Steve West, chairman of the University Alliance, which represents 22 of the newer universities, tells The Times the plan would "penalise universities that take students from non-traditional backgrounds, who are more likely to stay within the region they study in and go into lower-salaried graduate work".

While The Independent warns that universities could be allowed to raise tuition fees above the £9,000-a-year ceiling set by the Treasury. "There are fears that only the top ones could afford to take on the risk of having unpaid loans, raising the prospect of a two-tier system," it adds.

Chris Cook, policy editor for BBC Newsnight, says care would need to be taken to protect academic integrity as the process "could spur grade inflation".

He adds that the idea, which is still in its infancy, would require "careful design" to avoid unwanted consequences. "For example," he says, "the easiest way to cut loan defaults would be to admit fewer women and students from poorer families, since both groups tend to have lower lifetime earnings."