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Government sells £900 million in student loans to debt collection company

Sale made as part of an effort to improve the nation's finances

Some 300,000 former students could soon face a barrage of fresh debt demands after the Government announced it was flogging student loans worth £890m to a private company, renowned for its persistent debt recovery practices.

Erudio Student Loans has agreed to pay £160m for the loans, taken out by students between 1990 and 1998.

But it is the firms behind Erudio that are interesting. One is Arrow Global, a specialist debt recovery firm which buys loans that have gone sour from banks and credit card companies. Arrow – which floated on the Stock Exchange last month – is providing the expertise to manage the collection of these outstanding student debts.

The second is CarVal Investors. Like many private equity firms its business is pretty opaque, but it is known to have a very active arm in the UK focusing on buying distressed assets. It is in effect providing the money part of the deal, although Arrow invested £11m to buy the student loans portfolio sold yesterday.

The deal is a bit of a departure for Arrow. In the past it has focused on snapping up sour loans at a massive discount from banks and other finance firms.

The move into buying public sector loans could grow as the Government looks to get rid of more dodgy debt off its balance sheet. Tom Drury, the chief executive officer of Arrow Global, said: “This is an important step towards delivering this year’s financial goals and positioning the business for future growth.”

Yesterday’s sale involved the remaining rump – 17 per cent – of the mortgage-style student loans on the Government’s books. Two previous sales in 1998 and 1999 passed a combined £2bn of the loans to the private sector. About a million borrowers were retained by the Government’s Student Loans Company after the earlier sales and 69 per cent of those have subsequently fully repaid their debt.

That suggests there remain around 300,000 borrowers still to repay student loans from more than 15 years ago, and it is these that will be targeted by Arrow-backed Erudio.

Traditional bailiffs and similar firms are debt collectors that are charged with finding debtors and getting cash from them.

Debt purchase firms such as Arrow operate differently in that they bid for chunks of debt put on sale by finance firms who may have given up chasing the loans and are happy to get any kind of returns from them.

Typically debt purchase firms pay just a few pence in the pound for these dodgy debts and then carpet bomb potential debtors. In the past that has led to many complaints about innocent people receiving threatening letters, phone calls or even visits simply because they have the same number as a debtor, or used to live at the same address as them.

As the debt purchase firms own the debts, they only make money if they can collect on them, so some tend use whatever methods at their disposal to do so.

However the industry has come under the scrutiny of the Office of Fair Trading and responsibility for its regulation will in April pass to the Financial Conduct Authority.

Most debt purchase firms took an enormous hit in the credit crunch when they were left saddled with too much uncollectable debt.

Arrow’s woes led it to be sold to the RBS Special Opportunities Fund in 2009. The Scottish bank – which is facing a fresh inquiry by banking regulators into allegations that it drove firms to collapse so it could buy back their assets at rock-bottom prices – still retains a third of the business after last month’s IPO, which saw shares debut at 205p. The shares topped 265p earlier this month but yesterday fell 6.5p to238p.

Universities and Science Minister David Willetts ignored the implications for former students when he announced the sale yesterday morning. 

Instead he said: “The sale of the remaining mortgage-style student loan book represents good value for money, helping to reduce public sector net debt by £160m. The private sector is well placed to maximise returns from the book which has a deteriorating value.”