40% student loans default expected

Around 40% of new loans issued to students might never be paid back, a senior civil servant has told MPs.

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Statements from the Student Loans Company Limited, as it was estimated 40% of new loans issued would not be repaid

Around 40% of new loans issued to students might never be paid back, a senior civil servant has told MPs.

Martin Donnelly, the permanent secretary at the Department for Business, Innovation and Skills (Bis), said the 40% estimate was at the "top end" of what they expected would not be collected, but was "not unrealistic".

The Commons Public Accounts Committee heard that in 2010 it was estimated that 28% of money loaned out would not be repaid, but by 2013 that had risen to 35% - and could now be as high as 40%.

The committee's chairwoman Margaret Hodge said the resource accounting and budgeting (Rab) charge, which is the proportion of loans issued that Bis does not expect to be repaid, involved "massive cost to the public purse".

Mr Donnelly said the latest estimate of the Rab charge was 35% to 40%, but Mrs Hodge said the higher figure was the more likely amount.

The senior civil servant told her: "At the moment, that's at the top end of our estimates but it is not unrealistic."

He added: "Most of that is due to people not repaying, usually some of what will be overall owed."

Student Loans Company chief executive Mick Laverty updated the MPs on an investigation into finance provided to Romanian and Bulgarian students.

Universities minister David Willetts last month froze payments to students from the two countries at "alternative providers" such as private colleges, following suspicions about eligibility for student support loans.

So far, 92 cases had been identified as ineligible, Mr Laverty said, and efforts would be made to claw the money back.

Mr Laverty said: "We have currently suspended all payments to what we call A2 applicants, that's students who are applicants from Romania and Bulgaria at what is termed alternative providers.

"That applies to around 7,500 students.

"We did that specifically because we were picking up in our analytic work at the Student Loan Company quite high instances of those applications or those applicants at alternative providers.

"When we did some sample testing, we weren't satisfied that all of them were passing the residency requirements so, working with our partners in Bis, we suspended payments.

"We are literally going through, on a case by case basis, every single application to make sure they comply with the residency requirement of being resident in the UK for the three years prior to study.

"As we sit here today, we have completed 35% of that exercise, so we have reviewed 2,635 individual cases and we have cleared 839 - that's 11% of the overall total.

"We think out of the ones we have looked at so far, 92 cases, so that's 1.2% of the overall total, are ineligible and that process is continuing on a daily basis.

"No-one will receive another payment until their application has been thoroughly scrutinised and they have been cleared as being eligible and for those that are deemed to be ineligible we will be recouping the money from them as individuals or from the alternative provider in the case of tuition fee loans."

Last month, the National Audit Office produced a critical report which suggested m ore than £5 billion of public m oney paid out in student loans was unaccounted for because the Government did not have enough information about the recipients.

It found around 368,000 students who have borrowed money whom the Business Department (BIS) does not have a current UK employment record for, or other details on earnings, according to a study by the National Audit Office.

This could be because they are unemployed students living in the UK, EU students who have returned home or UK students who have moved overseas.

It means that the Government does not have enough information to decide whether these students should be making repayments on their loans, and if so, how much.

Under the current system, students only repay their loans when they are earning a certain salary - now set at £21,000 - and repayments are linked to their earnings.

The NAO's report concluded that in total this group had a total remaining debt of £5.3 billion.