A loan source of university income

Adequate public funding of higher education is not possible for a mass system. The only way British universities will get more resources is from the private sector. What is needed is a loan system that allows students to borrow private money.

To achieve this, student loan repayments should take the form of an add-on to borrowers' national insurance contributions and student debt should be securitised, that is, sold to the private sector. Repayments would depend on income levels after graduation so they do not affect access. This and a securitised debt bring immediate cash into higher education.

There are advantages if the Student Loans Company is private, not least because of Treasury rules about what is and what is not private spending. It is an open secret that the Government is about to sell the SLC. The worry is that a commercial owner would load loan terms in favour of the lender.

But there is a solution. The proper owners of the SLC are the 104 universities. They are uniquely placed to own the SLC because they alone face a double market test. Students are their main business and therefore universities' priority is to get them the best deal. They also face a financial market test; since the price at which student debt can be privatised is higher the more credible the repayment mechanism. The use of national insurance contributions is crucial in this context.

If universities own the SLC, they are less subject to political interference, thus protecting academic freedom and assisting rational financial planning. Any profits on SLC operations return to the universities. One source of profits is the SLC's list of graduates. The benefits from the list should accrue to the university system through better loan terms.

Would universities bear any of the financial risk? The answer is no. The mechanism for bringing in private funds is to sell student debt to the private sector through a technique known as securitisation. Suppose the SLC wishes to sell Pounds 1 billion of student debt. Simulation studies suggest that in the long run 15-20 per cent of borrowing will not be repaid because of low earnings, emigration, premature death, etc. If loans pay a satisfactory interest rate, the private market would buy Pounds 1 billion of student debt for about Pounds 800 million. The Treasury pays only the remaining Pounds 200 million, rather than total student borrowing as at present. The financial market bears the risk of loan repayments falling short of Pounds 800 million.

How would administration work? Universities already own the Universities and Colleges Admissions System. There could be efficiency gains from integrating some aspects of the administration of UCAS and SLC. There is also the potential for cost recovery. Banks would pass administrative costs on to the borrower. The SLC would use the proceeds from the list of graduates to offer borrowers a better deal.

How would the universities manage the SLC? The universities would be the shareholders. They would elect a board of directors that would include some vice chancellors, but could (and should) include directors who are not vice chancellors, and possibly student representation. Given Treasury involvement, the board of directors would include a GovernmentTreasury nominee. Vice chancellors do not necessarily have the skills to manage what is in important respects a bank. But the SLC management team does, and that capacity could be expanded.

Finally, how would universities find the money to buy the SLC? The only real value of the company is its stock of accumulated debt, currently around Pounds 2 billion, which would be sold to the market. The remaining value (computers, software, etc.) is at most Pounds 2 million. Thus the universities could buy the SLC for about Pounds 20,000 each.

This may sound as though universities would become heavily involved in higher education finance. They would and should. There will be tough negotiations between Government and financial markets. If universities own the SLC they become central participants instead of powerless spectators in talks about their future.

Universities need to move fast. The Government is likely to sell the SLC and its debt book soon. Meanwhile, universities are grappling with the dilemma addressed by the London School of Economics court of governors last week, namely the worry that fees risk access but the lack of fees harms access -most particularly for UK students - and reduces quality. The objective is to promote access and restore quality. Both are possible with the right loan scheme administered the right way. In a world of mass higher education and plural funding sources, it is essential that universities have the capacity to be active financial as well as academic participants.

Iain Crawford and Nicholas Barr are members of the Education Funding Group,Centre for Educational Research, London School of Economics and Political Science.