The Guardian last week revealed a secret report commissioned by the government from Rothschild bank, looking at ways in which the student loan book could be made attractive to private investors and sold off. The report is still under active consideration at the Department of Business, Innovation and Skills (BIS) and, notably, ministers have failed to deny its contents.

Vince Cable and David Willetts have a fundamental problem, as they have yet to settle with the Treasury over their share of austerity in the present comprehensive spending review. The student loans scheme that was rushed through in 2010 is widely recognised to be fiscally unsustainable. The resource accounting and budgeting charge (the percentage of loans that will never be paid back) is estimated by the Institute for Public Policy Research to stand at 39.4%, creating a considerable black hole in the deficit reduction programme.

The government's higher education policies have seriously damaged student take up of degree places, indebted future generations, caused chaos in universities, irreparably undermined trust in the coalition government, and added to the national debt. As the election approaches and a sale of public assets looks a likely option for a cash-strapped government, something has to give with student loans.

The Rothschild report, cruelly dubbed 'project hero', shows that from the very beginning of its tuition fees policy, the government has been looking to sell the whole thing off, including pre-2012 loans taken out on quite different terms. Post-2012 loans are unattractive to sell due to the large amount that will never be paid back, while the report points out that the rates of interest on pre-2012 loans offer slim pickings, calculated at the bank of England base rate (currently 0.5%) plus 1% or the retail price index (RPI), whichever is lowest.

In order to incentivise private investors to take on student loans Rothschild recommend either changing the terms for all existing borrowers over the past 15 years, or asking the Treasury to guarantee the difference between present interest rates and an acceptable yield through a euphemistically-named 'synthetic hedge'. What this tells us is that the student loan book is an unsellable asset. The former option would be a gross betrayal of young graduates; the latter option would represent an extraordinarily bad deal for the taxpayer.

As they desperately grasp for policy solutions, ministers at BIS are looking seriously at a piece of research undertaken by academics at Oxford and Cambridge, attempting to map graduate earnings against student loan repayment histories with a view to proposing differential interest rates by university and by subject studied. Another report suggests that lowering the loan repayment threshold of £21,000 is also under active consideration.

To sell off the loan book and to underwrite private profit makes no sense as a deficit reduction measure – the government will always be able to service the debt more cheaply than private institutions. The only conclusion to draw is that any proposed sale is driven by an ideological belief in privatisation. The European Union already recognises student loans as a form of private money, describing the balance of funding in UK universities as 70:30 in favour of private over public money, the lowest public contribution in the OECD.

'Project Hero' proposes to deepen this public-private muddle by either transferring further public money for private gain through this synthetic hedge or using powers that only a government has to increase loan terms with the same result of enriching private investors. In the meantime, graduates who had hoped to pay off their loans will see further years of debt stretching before them with middle earners most badly hit.

These loans were mostly taken out by 18-year-old school leavers on the promise of making a contribution to their own university education. To change the terms and pass them over to those seeking to extract private profit would be a financial scandal tantamount to misselling thousands of pounds of debt to aspirant school children.

The Rothschild report cynically suggests a script for ministers to persuade graduates to accept the worsening terms of their loans, telling them that they had a much better deal than current students and that they should be happy to pay more.

If the government can advocate raising the rate of repayment for students of the past 15 years on these grounds, they should go all the way and tax members of their own generation who got their university education for free and were at one time even paid to attend university. Of course, this would require a complete rethink of present funding arrangements.

Since the student demonstrations of 2010, the coaltion has hidden behind instruction to quangos and ministerial powers to avoid public scrutiny and parliamentary debate over the funding of our universities.Vice-chancellors have been complicit in this affront to the intellect, because they believed that in the short term these arrangements would bring in more money to their universities.

This plot against graduates risks undermining trust in the loans system and the entire university application process, tearing a big hole in the social fabric of the UK in the process. It is time to walk away from this trainwreck of a policy and start again.

Martin McQuillan is dean of arts and social sciences at Kingston University, London – follow him on Twitter @mgmcquillan

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