Why would a government sell off student loans?

Question

This question was brought on by the recent news that government owned student loans in the UK are being sold off to a private company.

How is this financially beneficial for the government? The way I see it, a company would only buy the loans for less than what can actually be recovered, in which case the government could gain financially by just keeping the loans themselves.

The buying and selling of debt is treated like the buying and selling of almost any financial asset. — , Feb 06 '17 at 19:05
I'm tempted to flag to migrate to Finance.SE or Economics.SE — user4012, Feb 06 '17 at 20:06

score 11 · Accepted Answer · edited Apr 13 '17 at 12:54

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This kind of information is typically covered in a undergraduate finance class. You could probably get an older version of a text book inexpensively from Amazon. I'm not going to focus on the UK specifically, because this happens in many governments (and in the US, it happens through private student loan companies).

Time Value of Money

User RedGrittyBrick hit the nail on the head in his comment: money today is better than money tomorrow.

Risk

Every loan comes with the risk that it won't be repaid. By selling loans, the government removed the risk on non-payments entirely.

Interest Rate

If the loans had fixed interest rates, it could be that the interest rate provided by the market is more attractive now (or is expected to be in the future). If that were the case, they would want to sell their current loans (with the worse interest rate) to make more loans (at a better interest rate).

They Need Cash

Banks often sell loans when they need cash to make other investments or loans. A government might use the same reasoning when deciding to sell loans to put the money in their general fund, to be used for general operating expenses.

Why the UK and why now?

I don't follow UK politics very closely, but the Telegraph reported that the current Treasury minister has a goal of reducing the deficit. Selling loans isn't a good way to boost your revenue (since the value of the future payments is hopefully larger than the amount loaned due to interest), but it would provide immediate cash to pay down a deficit.

edited Apr 13 '17 at 12:54

Community

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answered Feb 06 '17 at 17:22

indigochild

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These are great standard reasons to sell loans. And I have no reason to believe they are not the whole of the issue, but I always assume politicians are politicking, are there other effects that might be worth noting? Has a UK government ever forgave loans it held? Or are there some other change in status with this change? – Feb 06 '17 at 17:35
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@notstoreboughtdirt - I looked around and didn't see any primary sources explaining why the sale was happening. There are some news articles; I included one in the answer. – indigochild Feb 06 '17 at 18:14
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@notstoreboughtdirt It gets complicated. Many on the left see this as another step in a progression from a low interest loan pegged at the inflation rate, with means tested repayment towards a deregulated market valued loan system. Whether higher education has a social component or not is a political football in the UK, as in many other places. – origimbo Feb 06 '17 at 19:34
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You're also missing prepayment risk (not a big deal but worth mentioning) as well as duration conversion (you are exchanging financial instruments with duration X for financial instruments with duration Y). – user4012 Feb 06 '17 at 20:07
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Re: your last paragraph, one more factor could be - needs checking - that may be current debt servicing rates by the government is higher than the effective interest collected from student loans. Unlikely but not impossible. – user4012 Feb 06 '17 at 20:09
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Cost of collection can be a contributing factor in these as well. As an overly simplified case if it takes me $125,000 in debt collections and legal fees to get $200,000 of debt paid, whereas you can do it in $50,000 you could likely purchase the debt for $75,000. I'd come out even, you'd come out $75,000 ahead. – Myles Feb 06 '17 at 22:38
Governments aren't known for their efficient processes, so debt collection is likely something that could be done privately at a much lower cost. – Myles Feb 06 '17 at 22:39
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@Myles: This is collected through the tax code (PAYE), so it likely to be far more efficient than any alternative as the information is already known and the work is 'contracted out' to the employer. – nicodemus13 Feb 06 '17 at 22:52
@Myles debt at this level is likely not being sold directly to debt collectors. It's not an issue of collecting. It's just standard fiscal procedure in both the private and public sector. – Feb 07 '17 at 00:17
It could be worth mentioning the risk of non-repayment specifically of student loans compared to other debts, with statistical support. I don't have stats to cite, but anecdotal evidence suggests there are a lot of people who graduate with astronomical debt from student loans and no real idea of how they can possibly pay it off. – Wildcard Feb 07 '17 at 06:00

score 1 · Answer 2 · answered Feb 07 '17 at 01:05

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indigochild's answer doesn't address it well at all in my opinion. Yes, all the factors mentioned are correct but they will be factored into the cost. In the long run the government is worse off for selling off assets.

Governments sell off assets to make the budget numbers look better. That's it.

answered Feb 07 '17 at 01:05

Loren Pechtel

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Did you consider that some student loans (at least in the U.S.) are astronomical and are unlikely to actually be repaid? – Wildcard Feb 07 '17 at 05:58
@Wildcard Comparisons get complicated because of different systems, but currently in England & Wales the maximum government backed loan is something around £20k per year, and most degrees are 3 years. The interest rate varies from inflation (currently ~1.6%) to inflation + 3%, depending on graduate earnings. Calculators like http://www.moneysavingexpert.com/students/student-loans-tuition-fees-changes#tabTwo guess someone needs a starting salary of £40,000 to have a chance of repaying the loan. – origimbo Feb 07 '17 at 19:38

score 0 · Answer 3 · answered Feb 07 '17 at 12:05

How is this financially beneficial for the government?

Government's sell off their assets for lots of reasons: they want to deploy their capital more effective somewhere else. They need to monetize their assets. They no longer want to be in the business of making student loans. They want to privatize. They want to sell of their bad assets. They want to shrink the size of the government. ....

The list goes on.