The United Kingdom’s plan to sell student loans worth about 4 billion pounds to private investors is getting new scrutiny after Moody’s rating agency last week downgraded a package of student loans that were sold almost 20 years ago.
That first set of securitized student loans, sold around 20 years ago, is the main precedent for the UK’s current plans to sell loans whose repayments began between 2002 and 2006.
Moody’s downgraded the securitized student loans sold in the 1990s due to failure to meet consumer credit laws. The securitized loans were serviced between 2002 and 2016 by private companies Ventura Plc. and Capita Plc. Both companies sent notice of arrears to borrowers that didn’t meet consumer credit law requirements.
As a result, an estimated 22.5 million pounds of interest and charges is expected to be refunded and cost 5 million to 10 million pounds to process. Moody’s said that it expects these costs “will be fully borne by the transaction,” which will cut future cash flow to pay bondholders.
However, analysts said the packaged student loans that the UK government plans to sell this time will be different. Debts won’t start being repaid until income has risen above a certain threshold, and the payments will be automatically collected by UK tax authorities from paychecks and serviced by the federal government. As a result, risks should be lower in the current offering.
“You’re right at the front. The borrower never sees the money,” said Andy Brewer, a senior director at Fitch Ratings. “The default rates on the old style have been very high. You could argue it would be lower down the borrower’s list of priorities — if you’ve got a credit card or mortgage, you’d probably pay them off first.”
Author: Donna Fuscaldo
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