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British Student Loans -- The Giant Scam That Robs The Nation

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It was one of the grand projects of current JP Morgan Director, Tony Blair, in one of his previous employments as British Prime Minister: make university education open to the many. The many here was meant to be 50% of the young now going through education. The plan included making students pay for their higher education through loans. In the earlier years of the project, they paid just a little, then a lot, then practically the whole of the cost of the education.

Students now going through university will emerge up to their eyes in debt and this debt will dog them for years. Debt is not a superficial aspect of life. It drags you down. R.W. Emerson whom I cited in Newsletter 109 put it aptly when he said back in 1836 "Debt, grinding debt "  which disheartens a great spirit with cares that seem so base.." Debt is a scourge of our lives.

Leaving aside the question of whether we really need 50% of our young going to higher education, let us ask whether there is any alternative to making people pay for higher education and let us ask whether it might be more sensible for the nation to pay for it. All the four main parties (we have to say "four" now with UKIP at 10% in the poles) support the current system, the only debate being about whether former students should pay for the education with loans or whether they will should do it through taxation -- the so-called "graduate" tax.

Education is an investment. Everyone is agreed on that. An investment, let us remind ourselves, is simply this. You place money in a certain way by purchasing a good or a service and you expect to see a return, a payback, at some later date on the money you placed. If the investment is sound, the payback will cover, or more than cover, the costs involved in the investment, that is, the money placed and the charges (interest, fees, etc.) incurred. In short, a good investment shows a profit.

Let us consider education as an investment in two ways:two, as an investment by the state.

At present, it is the individual who makes the substantial investment in higher education, with the state just contributing some financial support through capital expenditure and some fixed costs. Essentially it is the student who buys his or her education by taking out a "student loan" and then has to repay that loan during their working life. The payback comes, in theory, in the form of higher salaries than would have been the case without the education. If that does not happen the investment loses money and the individual has debts that will be difficult to pay off.

Thus, at present, the state invests relatively little in higher education. The investment is seen purely as an individual matter.

Now look at education as a different kind of investment: an investment by the state, ie, by the nation. In this, the government finances the education of students itself and also gives the student a grant to enable them to support themselves during the period at university. In any current discussion by the main parties on the subject, that situation would be considered as a straight loss for the government with no payback of any kind in the future. Thoughts would be directed only to the increase in government debt today. That is all. It was not so in Britain in the past and it is not so in other countries today (eg. France).

Investment, as I said, is where you place a sum of money today in order to see a payback and a profit in the future. So how does a government investing in education today get its money back? Simple. Through future taxation. The economy needs an educated workforce in order to compete and prosper in the future. Without that, we will go into decline and as the economy falters so will government tax revenues. But can we be sure that the money invested in education will be recovered in the future through taxation? For,if it is not recovered the government will be out of pocket and the national debt will rise.

Well, clearly we will never be able to carry out a watertight accountancy exercise to show that investment in education is a "good deal" for the government. Any attempt to put figures on the matter is foolhardy. You cannot estimate the benefits that ensue from having a well educated population. But equally you cannot over estimate them. If you want to appreciate all the benefits you have also to put into the equation that free education means social mobility and so the nation benefits from talent that would otherwise be wasted. The social mobility also creates a financial benefit for the nation by reducing isolated deprived communities that nurture delinquency and crime. I could go on. The associated benefits are as enormous as they are unquantifiable.

But leaving aside the larger societal perspective, the strong likelihood is that the government will collect sufficient returns on its investment simply and visibly through taxation. After all, if it works for the individual, it must also work for the government, and for this reason. By the government investing it has one big advantage over the individual -- the interest rate on the loan. Under the present economic model the government would finance the education through bond issues which would attract a much lower interest rate that the individual student loans. 

Now a Democratic Republican Party government will do better than that. It will change the whole financial system and the government will not raise the money through bonds issues but through direct money creation. This will eliminate the interest charges so making the investment much more profitable for the government. Once this system is in place, there will overall be no increase in the money supply, as collection of taxation directly and indirectly will pay back the investment. (It is, by the way, vital to control the money supply because too big an increase would result in economic damage.)

We now come back to the question: why do the current parties favour putting people into debt in order to take higher education? To answer this we have to bring in our old friends that feature so often in these newsletters: the banks and the non-taxpaying global superrich. These are the real drivers behind the current policy of massive student indebtedness. They have an insatiable need for debt that they can buy and profit from and the JP Morgan Director we mentioned at the beginning of this piece was an enthusiastic promoter of their interests when a holder of political office, prior to taking up his -1 million per year official position among their ranks.

It works like this. It is all down to the magic of securitisation, the financial instrument dreamed up in the 1960s but that really took off in the 1980s and reached stratospheric proportions in the noughties. All, yes, all, student loans are now subject to securitisation. The high street bank that offers you the loan is just an agent collecting the fees for "originating" the loan.

The student signs up for the loan and is then in long term debt. This makes this individual's financial life perfect for securitisation. The banks transfers a big bundle of student loans to a company called a special purpose entity (SPE) so they are shifted off its balance sheet, freeing it up to make more similar loans. The SPEs are located in tax havens, usually, the British Cayman Islands, and the fact that they are in tax havens is integral the high profitability of the deal. The SPE then performs the "securitisation" process, whereby it takes the bundled up loans and divides them up into sellable units called collateralised debt obligations (CDOs). These are then offered on the global market. Many will be bought by individuals who avoid tax in a variety of way such us by hiding behind shell companies registered in tax havens or secretive low tax countries like Switzerland. Meanwhile the student tries to get on with his or her life and in doing so supports the global banks and their superrich clients.

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Excellent piece, Mr. Kellow. One point of caution... by Alan Collinge on Monday, Oct 8, 2012 at 2:23:28 PM
Excellent piece, Mr. Kellow. One point of caution... by Alan Collinge on Monday, Oct 8, 2012 at 2:24:55 PM