Student loan system at “tipping point”

A GROUP of MPs have warned that loans system is at “tipping point” due to Government miscalculations and problems with collecting repayments. This warning comes from a cross-party group of MPs.

tipping point loansIn an important new report, the Commons Business Select Committee stated that the current loans system is under threat, and an urgent review is needed to address the issue.

In 2012, major reforms of higher education funding saw tuition fees at English universities trebled to a maximum of £9,000. The earning cap at which graduates begin paying their loans back was also raised to £21,000 a year. With the debt being written off after 30 years.

Figures published earlier this year show that the Government’s latest estimate – known as the “RAB charge” – is that around 45% of loans taken out under the new system will never be repaid.

The threshold before the Government will start to lose money as stated by experts is 48.6%. Therefore, the RAB charge indicates that the under the new system, the Governement is close to losing money, rather than gaining it – effectively cancelling out the benefits of raising tuition fees.

However, in its report the select committee concluded that the Business Department has a “worrying record” of miscalculating its estimate of the RAB charge. It added:

“More disturbing is the fact that independent forecasters have been recommending improvements to the Government’s methodology for some years, which the department has ignored. We recommend that it starts to listen now.”

The report further suggests that the Government is already struggling to collect student loan debts. Around 14,000 graduates living overseas are behind on their repayments, and the select committee argues that a large proportion of outstanding debt from this group is not because they do not know how to pay, but “rather that they are avoiding making payments”.

It also stated that the collection targets set for the Student Loans Company by the department are not fit for purpose, and concluded that an urgent review is needed on the sustainability of the student loans system:

“We are concerned that Government is rapidly approaching a tipping point for the financial viability of the student loans system.”

Committee chairman Adrian Bailey said:

“The Government’s estimates indicate the size of outstanding student debt will increase to more than £330 billion by 2044.

“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 report also says that proposals to sell off the student loan book – which were announced last year by Chancellor George Osborne, but have allegedly been called off by Business Secretary Vince Cable – could bring a “significant windfall” to the public purse, but warns that the department has yet to prove that selling the assets would be good value for money.

The committee’s report is the latest in a series of reports to issue warnings about university funding. In November last year, the National Audit Office said that more than £5 billion of public money paid out in student loans is unaccounted for because the Government does not have enough information about the recipients. There are around 368,000 students who have borrowed money for whom the Business Department does not have a current UK employment record for, or other details on earnings, according to the spending watchdog.

A report by the Commons Public Accounts Committee (PAC) found that writing off student loan debt could cost the public purse more than the Government has forecast, suggesting that the Government is underestimating the value of student loans that will never be paid back. Shadow minister for universities Liam Byrne said:

“Another day, another damning indictment of the Government’s failed tuition fee regime.

“They’ve burdened young people with a debt they cannot afford, and now the taxpayer is liable for £330 billion over the next 30 years.

“This is unsustainable and the cross-party BIS committee is right to call for an urgent review into the sustainability of the student loan system.”

A Business Department spokeswoman said:

“We welcome the publication of this report and will take seriously the recommendations that have been made by the committee.

“The costs of the loan system are based on projections of graduate repayments over the next 35 years. These projections will continue to fluctuate due to numerous macroeconomic variables, and present no immediate pressure on the system.

“This report draws heavily on an NAO report from November 2013. The department has since updated the model for student loan repayments in line with their recommendations and the new model has been reviewed both internally and by the NAO as part of the process for producing the BIS accounts.

“The Government is committed to ensuring that the taxpayer is receiving value for money. This is why we are continuing to work with the Student Loans Company on improving best practice and have already dramatically tightened the regime for recouping repayments from graduates both domestically and overseas.”