Mortgage-style loan: next in line for a Scottish amnesty?

Andrew McGettigan has just highlighted a surprising £2,000 fall in the income threshold for old mortgage-style student loans, below which repayment can be deferred for 12 months.  It is now £26,727.

Mortgage-style loans were the original form of student loan, issued to students before 1998, in place of grant and more generally for living cost support at higher incomes.  These loans, including the old accounts for Scottish students, have been sold off to the private sector.

In the light of the announcement that councils will be required not to collect old poll tax debt in Scotland, these old student loans deserve some attention.

The arguments the Scottish Government have put forward for a poll tax, but not a council tax, amnesty are that the debt is old (pre-dating 1993) and that the old system, unlike the new one, is discredited because it lacked adequate protection for those at low incomes.

Something very similar could be argued for mortgage-style student loans.

They have not been issued since the late 1990’s.

Unlike the  current income-contingent system, monthly repayment levels are only crudely linked to earnings. Borrowers start to repay their loans from the April after they complete, or otherwise cease to attend, their course, unless they qualify for deferment because of low income. Mortgage-style borrowers may apply for deferment of repayments for a year at a time if their income is below 85%  of national average earnings.  Otherwise, however, they are expected to clear the debt in 60 monthly repayments.  Depending on the total amount outstanding, that could mean significantly higher monthly repayments than under the new system at particular incomes. These payments may not last as long, but they have potential to cause greater hardship while they do.

In addition, a substantially higher interest rate applies to these loans than to those used since 1998. According to the Student Loans Company (SLC), in financial year 2012-13 the interest rate used to adjust the outstanding balances on mortgage-style loans was 5.3% (as measured by the March 2011 RPI) up to the end of August 2012, and 3.6% (as measured by the March 2012 RPI) from the 1 September 2012. This compares to 1.5% for those issued since 1998.

Last of all, these loans have been privatised, which might be argued to be at odds with the strong position the Scottish Government has taken against the comodification or  “marketisation” of higher education.

In June 2013 (see report for Scotland dated 25 June 2013, here), the relevant SLC statistical report for Scotland noted that: “A portfolio of UK student loans to the value of just over £1bn was sold to the private sector in March 1998. A second tranche to the value of £1.03bn was sold in March 1999. In each of these sales a portion of around £110m related to loans to Scottish students. The loans sold were mortgage style; none of the income contingent loans available from the 1998/99 academic year were involved in either sale.”  In June 2014, the next update added: “Mortgage Style Loans no longer appear in this publication because the remaining balances as at the end of May 2013 were sold by the Government. The balance on Mortgage Style Loans for Scottish domiciles at the end of financial year was £124.1million.”

The SLC June 2013 report noted that during 2012-13, just over £7 million of repayments were received (Table 1 in the document) for this type of loan. It also recorded some 39,000 Scottish borrowers with live mortgage-style accounts, who had not been transferred at that point to the private sector.

Any action here is therefore potentially more expensive than the proposed poll tax write-off, where the Scottish Government appears to be planning to limit compensation to councils to current levels of collection, standing somewhere round £0.4m a year.  That said, much of the mortgage-style debt must be heading to the point where under the write-off rules (see end of post) it would be cancelled. So it is hard to predict what price the new private owners of the debt might settle for.

As an issue of principle, these two cases present parallels.  Moreover, in 2007, the Scottish National Party stood on a strong campaign platform of “dump the debt” (see here), proposing the write-off of all old student debt. Although this pledge was not repeated in 2011 manifesto, neither was a poll tax write-off included there.

Last of all, just as for the poll tax, it is likely that the expanded electoral roll will be used by private debt collecting agencies to help identify any outstanding cases of mortgage style student loan default.

At the very least, it would be fair to ask the Scottish Government for a reasoned position as to why the two cases are being treated differently, what (if any) benefit it received from the final sell-off of these loans in June 2013 and whether it has explored what the cost would be of writing off the outstanding debt here.

It is possible there may be legal barriers to the Scottish Government taking action here, under the detail of the current devolution settlement.  However, with the boundaries of devolution currently under discussion, it seems unlikely that that needs to be treated as an insurmountable obstacle.

Write-off rules for mortgage-style loans

For completeness, here are the debt cancellation rules which apply to this type of loan, taken from the June 2013 SLC statistical report:

A Mortgage Style Loan borrower’s liability shall be cancelled:

When the borrower dies;

If/when the borrower is not in breach of any obligation in relation
to any loan and, if they were under 40 years of age when they last
entered the loan agreement, when they reach the age of 50 or
when the loan has been outstanding for not less than 25 years
(whichever is the sooner); or

If the borrower was over 40 years of age when they entered the
loan agreement, when they reach the age of 60.