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Student loans system reaching tipping point

22 July 2014

A persistent record of inaccurate debt forecasting and a failure to collect student loans effectively threatens the continued existence of the current student loans model, says the Business, Innovation and Skills Committee in a report published today.

The Committee calls for the Government to undertake an urgent review of the student loans system and expresses concerns that the Chancellor’s removal of the cap on student numbers may result in a multi-billion budget gap.

Under the current student loan system for students residing in England, the Government loses around 45p on every £1 it loans out. Yet the Committee found the Department of Business, Innovation and Skills (BIS) has a worrying record of miscalculating just how much it will lose on a student loan at the point it pays out. The Committee found this persistent error, resulting in the collection of £111m less than expected in 2011-12, had been compounded by the Government’s refusal to adopt a range of improvements suggested by independent forecasters.

Adrian Bailey MP, Chair of the Committee, said:

"The Government’s estimates indicate the size of outstanding student debt will increase to more than £330bn by 2044. With the prospect of a large potential black hole in the government's budget figures, Government need to get its act together and properly calculate how much of these student debts are ever likely to be paid back. The Government needs to set out a clear timescale for pushing ahead with a review of the overall student loans system because the alternative is an unfunded model which would leave students, universities, and taxpayers with a very raw deal indeed."

The Committee found a lack of rigour in the collection of student debt; that graduates working abroad find it too easy to avoid making payments; and that collection targets set for the Student Loan Company (SLC) by the Department are not fit for purpose. The Committee backs the NAO’s recommendation, urging the Government to set the SLC an annual target of money collected and required the SLC to explain any shortfall.  As part of the urgent review, the Committee also recommends the Government look to examples of effective student debt collection, such as in the USA.

The Committee agrees that removing the student numbers cap is a worthy aspiration but raises concerns that the Chancellor’s linking of this policy to sales of income-contingent student loans could result in an additional burden on the tax-payer. Given the uncertainty around how much could be realised through these sales, the Committee has called for the Government to set out how the £5.5bn required between now and 2018-19 will be raised.

The Committee recognises that sale of the income-contingent loan-book could bring a significant windfall to the public purse. However, the Committee questions the ability of BIS to get a good-return for the taxpayer. The Government’s own commissioned analysis suggested that a current proposed sale would raise only £2bn rather than £12bn expected by Government without an unusual (and potentially costly) deal made to protect the private investor. We have recommended that Government set out the costs of the sale, as well as the benefits, so that full value for money can be assessed.

Adrian Bailey MP, Chair, said:

"The financial funding system for higher education is looking increasingly fragile, coming under the strain of unfunded commitments and poor debt collection. The student loans system needs urgent attention and it’s vital that BIS doesn’t further undermine the viability of the system by selling off the income-contingent loan book at a knock-down price."

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