Auction of student loans to raise £6bn

The Government's sale of £6bn in student loans is likely to attract the interest of private-equity buyers, hedge funds and pension funds.

The Queen's Speech confirmed Gordon Brown's plan, first announced in March by the then Chancellor, to sell a chunk of the loan portfolio run by the Student Loan Company to private investors. The Treasury expects to bank £6bn from the sale of tranches over the next three years, which would represent just under a third of the £16bn in loans that the SLC has granted to 3.2 million current and former students.

The auction is likely to attract interest from an array of investors hoping to take advantage of the rising cost of education and the same favourable sale terms that the Government has offered on previous privatisations.

In 2001, the average debt accrued by students doing a three-year university degree was £8,133. By last year, that figure had ballooned to £13,252, according to the debt collector Intrum Justitia. When the Government sold £4bn worth of loans between 1997 and 2000, it agreed to provide subsidies to make up the difference between commercial interest rates and the effective 0 per cent that students pay on the loans. It is unclear whether the Treasury will do so on this next round.

Yet investors are likely to be attracted by the investment profile, which includes very low overheads. When borrowers begin repaying – which happens once they begin earning more than £15,000 annually – they do so via salary withdrawals taken from HM Revenue and Customs.

There are drawbacks. Only home mortgages take longer to pay back than student loans, and the holders of the debts are susceptible to losing track of borrowers, who are more prone to relocate in the years following university.

The long repayment periods could mean that long-term investors such as pension funds, who are looking for stable but less aggressive returns, could be most interested in the sale. Bulge bracket banks looking to diversify investment portfolios may also be interested.

In America, JC Flowers, the private equity firm stalking Northern Rock, agreed to take over America's largest student lending group, Sallie Mae, for $25bn. Since then, however, the credit crisis has made securing favourable financing more difficult, and a change to the law governing repayments has further hurt its prospects, JC Flowers has argued. The firm dropped its bid for the company last month, leading the latter to file a lawsuit. JC Flowers fired back with a suit of its own.