In April 2009, the Student Loans Company announced that it will now be registering defaulting customers with the credit reference agencies (Experian, Equifax and Callcredit). Initially, this will only target customers who took out loans before 1998. Student loans taken out after 1998 are collected by HM Revenue and Customs (HMRC) with payments taken directly from earnings. This makes it much harder for these customers to avoid paying their debt.
The student loans Company believes that it has up to 60,000 customers who took out loans before 1998 who are failing to pay. Loans in default that will be registered with the credit agencies include those still owned by the student loans company itself and also Honours Student Loans which purchased a number of the loans over the past 10 years. The Student Loans Company believes that half of these (30,000 individuals) will end up being registered as defaulting with the credit reference agencies.
Defaulting clients will be given 28 days to agree a repayment or deferral plan. After this, customers who have not deferred and are not meeting repayment obligations will be registered with the credit reference agencies. Once a default is registered, it will remain on the individual's credit file for 6 years in line with the current industry practise. The default will show up if and when the defaulting client tries to apply for credit in the future. Many credit card companies and high street lenders will then be put off from offering new credit agreements or extending existing facilities.
The question is whether this new initiative is a good or bad thing? Prior to the initiative's launch, information about the non payment of student loans company debts was not disclosed. This meant potential lenders had no idea that the customer had a past history of credit problems. Arguably, this was not a satisfactory situation for either the debtors or potential lenders as people who were not in a position to repay their current debts were being offered additional credit.
Over the past 10 years, I have seen the negative effect of this situation. I have worked with many graduates who have taken student loans which they have not been able to repay on leaving higher education. If a graduate is lucky enough to find a job after leaving university, many find that they continue to borrow to fund their more expensive lifestyles. Subsequently they fall deeper into debt which is made even more difficult to repay because of their student loan repayment obligations.
Of course, controlled borrowing does not necessarily lead to credit problems. I strongly believe that where people are maintaining their student loan repayment, obligations, then they should have the opportunity to take further credit. These facilities can be vital in helping a graduate establish a new career which may require new accommodation, clothing and increased living expenses. However, I agree with the Student Loans Company when it argues that it is vital to make data on its problem clients available to potential lenders. If this does not happen then there is an increased risk that those already struggling to repay what they owe will be offered further credit and fall deeper and deeper into debt.
I would think that commercial lenders will also welcome this development which gives them the opportunity to minimize their losses by not lending where they feel that the risk of non payment is too great. Ultimately, if individuals who are defaulting on their student loan repayments are allowed to take further credit, it is likely that there will be difficulties with the repayment of the commercial credit into the future. If this happens and the individual then chooses to declare them self insolvent (entering into either an Individual Voluntary Arrangement (IVA) or Bankruptcy), the student loans Company is protected as their debt will not be written off within these procedures. However the commercial lenders will lose their shirts. This is clearly not a good prospect for lenders or the wider economy which, as we have seen in the past year, may suffer greatly on the back of unpaid bad debt.
The student loans Company believes that it has up to 60,000 customers who took out loans before 1998 who are failing to pay. Loans in default that will be registered with the credit agencies include those still owned by the student loans company itself and also Honours Student Loans which purchased a number of the loans over the past 10 years. The Student Loans Company believes that half of these (30,000 individuals) will end up being registered as defaulting with the credit reference agencies.
Defaulting clients will be given 28 days to agree a repayment or deferral plan. After this, customers who have not deferred and are not meeting repayment obligations will be registered with the credit reference agencies. Once a default is registered, it will remain on the individual's credit file for 6 years in line with the current industry practise. The default will show up if and when the defaulting client tries to apply for credit in the future. Many credit card companies and high street lenders will then be put off from offering new credit agreements or extending existing facilities.
The question is whether this new initiative is a good or bad thing? Prior to the initiative's launch, information about the non payment of student loans company debts was not disclosed. This meant potential lenders had no idea that the customer had a past history of credit problems. Arguably, this was not a satisfactory situation for either the debtors or potential lenders as people who were not in a position to repay their current debts were being offered additional credit.
Over the past 10 years, I have seen the negative effect of this situation. I have worked with many graduates who have taken student loans which they have not been able to repay on leaving higher education. If a graduate is lucky enough to find a job after leaving university, many find that they continue to borrow to fund their more expensive lifestyles. Subsequently they fall deeper into debt which is made even more difficult to repay because of their student loan repayment obligations.
Of course, controlled borrowing does not necessarily lead to credit problems. I strongly believe that where people are maintaining their student loan repayment, obligations, then they should have the opportunity to take further credit. These facilities can be vital in helping a graduate establish a new career which may require new accommodation, clothing and increased living expenses. However, I agree with the Student Loans Company when it argues that it is vital to make data on its problem clients available to potential lenders. If this does not happen then there is an increased risk that those already struggling to repay what they owe will be offered further credit and fall deeper and deeper into debt.
I would think that commercial lenders will also welcome this development which gives them the opportunity to minimize their losses by not lending where they feel that the risk of non payment is too great. Ultimately, if individuals who are defaulting on their student loan repayments are allowed to take further credit, it is likely that there will be difficulties with the repayment of the commercial credit into the future. If this happens and the individual then chooses to declare them self insolvent (entering into either an Individual Voluntary Arrangement (IVA) or Bankruptcy), the student loans Company is protected as their debt will not be written off within these procedures. However the commercial lenders will lose their shirts. This is clearly not a good prospect for lenders or the wider economy which, as we have seen in the past year, may suffer greatly on the back of unpaid bad debt.
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