The Government is studying proposals for the privatisation of student loans by inviting pension funds or banks to take over the scheme from the Treasury.
Conservative Party advisers at Central Office are working on privatisation plans which would involve repayments at a higher rate of interest than at present, in preparation for the party's manifesto at the next general election. Their report, due at the end of May, will also be used by Gillian Shephard, the Secretary of State for Education, in her review of higher education.
Student funding is likely to be a crucial election issue with all three parties now examining ways of injecting more private funds into higher education.
A paper seen by the Independent advocating the privatisation of student loans, which would save the Treasury £1bn a year, was presented to the manifesto policy group on higher education earlier this month.
At present, the Treasury lends the money for student loans for maintenance which are administered by the Glasgow-based student loans company. The company collects repayments and chases defaulters. A zero rate of interest is charged.
The paper, by Iain Crawford of the London School of Economics and a member of the group, proposes that private institutions should lend students money which would be repaid through National Insurance contributions (NICs).
The basic administration would remain with the loans company. The policy group of academics, businessmen and party officials agreed that the loan scheme should expand to allow students to borrow more and that a "real" rate of interest should be charged.
Both implicitly involve privatisation since the Treasury would not be prepared to lend more than it does at present, and pension funds or banks would demand a real rate of interest, probably around 3 per cent.
The LSE paper argues that the private sector would be willing to take over loans because repayments would be secured through NICs, which have a low default rate. Pension funds or banks would negotiate with the Treasury over the likely default rate. This would probably be between 10 and 15 per cent so the private sector would buy £1bn of debt for around £850m. However, if the default rate were lower than expected, the private sector would make a profit.
Repayments could be spread over many years but would be limited to 1p in the pound on all earnings above the national insurance threshold."Our scheme is not a graduate tax," the paper emphasises; it simply uses the tax system to repay loans.