Student loans system requires “urgent review” ahead of abolition of cap on numbers, according to MPs

Out-Law News | 24 Jul 2014 | 5:15 pm | 3 min. read

The planned removal of the cap on student numbers in England could lead to a “multi-billion budget gap” as a result of failures in the current student loans model, a committee of MPs has warned.

In a new report, the Business, Innovation and Skills (BIS) Committee said that an “urgent review” of the current system was needed before the government went ahead with plans to allow an estimated 60,000 more young people each year enter higher education by academic year 2015-16.

However, the BIS committee said that the removal of the cap could result in a £5.5 billion budget gap by 2018-19 without changes to the current model, under which the government loses around 45p on every £1 it lends to an English student. In addition, although the planned sale of the income-contingent student loan book could result in a “substantial windfall” for the taxpayer, it was not clear whether the government’s Department for Business, Innovation and Skills (BIS) would be able to get a good return on the sale, the committee said.

“The government’s estimates indicate the size of outstanding student debt will increase to more than £330bn by 2044,” said BIS committee chair Adrian Bailey. “With the prospect of a large potential black hole in the government’s budget figures, government needs 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 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,” he said.

Student places in England are funded through the student loans system, and BIS currently limits the number of places that are funded who did not achieve the grades ABB or above at A level. As part of last year’s Autumn Statement, the chancellor of the exchequer announced that 30,000 additional student places would be made available in academic year 2014-15 ahead of the removal of the cap entirely by 2015. New loans would be financed by “selling the old student loan book”, he said at the time; while the Autumn Statement document itself contained estimates of a £700 million annual medium term cost of the extra implied subsidy in these additional loans.

In its report, the BIS committee criticised the government’s “worrying record of miscalculating just how much it will lose on a student loan at the point it pays out”. Students do not have to pay back loans until they are earning £21,000 per year, and debts are written off after 30 years. When tuition fees at English universities were increased to £9,000 per year, the government forecast that it would lose 28p for every £1 loaned out. However this 'resource accounting and budgeting' (RAB) charge has now increased to 45p for every £1 loaned, according to the committee.

The committee was also concerned by the "lack of rigour" it found in student debt collection processes and the fact that collection targets set by the Student Loans Company (SLC) were "not fit for purpose". Of particular concern was the fact that around 14,000 graduates working abroad were behind on their repayments, a large proportion of which were not because they did not how to repay but because they were "avoiding making payments", it said. Backing last year's recommendation by public spending watchdog the National Audit Office (NAO) in its own report into student loans, the committee called on the government to set annual collection targets and study international examples of best practice in student debt collection, such as the system in place in the USA.

Universities expert Nicola Hart of Pinsent Masons, the law firm behind Out-Law.com, said that the potential uptake of student places after the cap was abolished was hard to predict.

"The Chancellor's announcement in the Autumn Statement that the cap on student numbers would be raised and then abolished came as a surprise," she said. "The government's policy to increase competition in the sector by encouraging and funding new players to enter the higher education providers market in England also seems to have helped to fuel demand."

"The number of potential takers for unlimited places is unpredictable. While it is great to encourage potentially a wider range of students into higher education, it may turn out that the pledge proves too expensive to maintain," she said.