Nationwide Building Society and Royal Bank of Scotland were seen as front-runners to buy up to £16 billion of student debt that the Chancellor is planning to offload.

Both institutions have bought portfolios of student loans from the Government in the past, attracted by the reliable income streams and the government subsidies.

The Treasury yesterday declined to comment on reports that it was looking to privatise the portfolio of the Student Loans Company, a business with 3.2 million borrowers.

Mark Hedges, head of structured finance at Nationwide, said: “We’d certainly take a look, but it would depend on the details.”

Nationwide, in conjunction with Deutsche Bank, bought a £1 billion portfolio of student loans, comprising 450,000 accounts, in 1999.

Royal Bank of Scotland, through its Greenwich Nat-West subsidiary, bought a £1.2 billion portfolio in 1998, packaged them up and sold mortgage-backed securities.

A sell-off could improve the public finances, allowing the Government to reduce debt and more easily meet its target of keeping public sector debt below 40 per cent of national income.

An auction of fresh loans could be very attractive to investors because of a change in the way repayments are collected. Borrowers now have repayments automatically deducted from their wage packets by HM Revenue & Customs.

Rothschilds has advised the Government on previous sales of student loans.

The privatisation would make no difference to the terms of the loans, but new owners may change the administrators. The loans bought by Nationwide are now administrated by Ventura, part of Next.

Students taking out loans with the Student Loan Co pay a real rate of interest of 0 per cent and a nominal rate of 2.4 per cent. They have to make repayments only when they earn more than £15,000. Any residual liability is written off after 25 years.

Private sector organisations buying the debt in the past rely on preagreed government subsidies to top up the loans to commercial levels. However, an auction could be structured in a different way, with the loans sold at a large discount to face value to compensate the new owners for the noncommercial terms.

Almost 881,00 students took out the subsidised loans in 2005-06, borrowing a record £2.93 billion – an average take-up of £3,330 per person.

The Treasury and the Department for Education and Skills, the sponsoring department for the Student Loan Co, had no comment.

“This will help Brown to meet his sustainable investment rule, which stipulates that net debt must average less than 40 pct of GDP over the cycle,” Jonathan Loynes, chief UK economist at Capital Economics, said.

However, the mooted sell-off would have no effect on the official government borrowing number, the public sector net borrowing measure, which excludes loans to students.

Last week the International Monetary Fund said that the Chancellor faced a critical test and urged him to rein in public spending to curb the sharp deterioration in the fiscal balance.

The loans

– Full-time students living away from their parents’ home in London can borrow up to £6,170, and £4,405 if they live elsewhere. Students living at their parents’ home can borrow £3,415

– Undergraduates may apply for 75 per cent of the maximum, while the remaining 25 per cent will depend on family income

– Graduates fell £186.3m behind in their student loan repayments for 2005-06. Students and graduates owe £18.7bn in loans, including those not yet due for repayment

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