Developing a competitive market place for student loans
The role of partnerships with student lenders in the development of a competitive marketplace for student loans in the UK
While the American experience of partnerships between universities and student lenders provides a cautionary tale, transparent partnerships established primarily for the benefit of students could help to develop a competitive market place for student loans in the UK.
In the run-up to the financial crisis very strong growth in the student loan market in the US led to anti-competitive practices whereby universities received kickbacks from some commercial student lenders in return for promoting loan products to students. This prompted Congress to enact new legislation in 2007 to clean up the industry. We can learn from the US experience. In the UK, partnerships between universities and student lenders can benefit both students and universities by lowering costs of funding and by making higher education more financially accessible.
Where partnerships exist between universities and commercial lenders, there should be complete transparency regarding the nature of the relationship and they should ensure that students are the primary beneficiaries. For example, Future Finance has established non-exclusive partnerships with seven universities in the UK, including London Business School, City University London and Regent’s University London. These partnerships facilitate more competitive loans for students at these universities as we pass on the cost savings we make from the reduced need for advertising. Above all, we make the partnership explicit. As the US experience showed, back-room deals hurt students.
Given the funding shortfall faced by students, estimated by the National Union of Students to be £8,000 per year on average, we expect more commercial loan providers to enter the student finance market in the UK. In order to help protect students there should be a rigorous code of conduct for the industry. This is especially important given that for many students, taking out a commercial loan will probably be the first time they have had to think about, let alone manage, debt. A code of conduct for the industry would cover interest rates, charges, affordability, and university partnerships. It would also ensure that students who apply for a loan are actively advised to make full use of government subsidised loans before taking out one provided by a commercial lender.
Commercial lenders are helping to expand access to higher education in the UK, but more could be done. As an example the Government could help by expanding participation in the Professional and Career Development Loan scheme from just a few banks to include specialist student lenders. Such a public-private partnership would help to facilitate a responsible, competitive and most of all sustainable marketplace, which is in everyone’s interest.
Brian Norton is co-founder and CEO of Future Finance, which lends to undergraduates and postgraduates at universities across the UK. Since it was established just over a year ago Future Finance has lent £10 million and has received more than 20,000 applications from students at every university in the UK.