Student loan forecasts ‘consistently’ wrong, says NAO

Ministers have been accused of “industrial scale incompetence” after a damning report on student loans was released by the public spending watchdog

November 28, 2013

Student loans

The National Audit Office said the government was “not well placed to secure value for money” on the £200 billion in loans that will be owed by 2043.

In its report published today, it finds that the Department for Business Innovation and Skills “consistently over-forecasts” the amount of student loan money it expects to collect annually “by around 8 per cent”, with the 2011-12 forecast “£111 million higher than the amount collected”.

Labour immediately highlighted this 8 per cent over-estimate, saying the NAO report means that the resource accounting and budgeting charge on the new loans system – the portion of loans that BIS does not expect to be repaid – is now above 40 per cent.

Liam Byrne, the shadow universities, skills and science minister, said that “blundering ministers got their sums so badly wrong” that BIS would have to find an extra £600 million a year from 2015-16 to cover the resulting “hole” in its budget.

He accused the department’s ministers, Vince Cable and David Willetts, of “industrial scale incompetence”.

The NAO notes BIS’ rising estimates of the RAB charge, where the most recent official figure is 35 per cent.

“If the RAB charge continues to increase, it may reach a level above which student funding becomes more expensive than it was before the reforms,” the NAO says. “Commentators estimate this level to be 47 per cent,” adds the report, citing a 2010 analysis by the Higher Education Policy Institute.

In the wake of existing claims that BIS is wrestling with a budget crisis and may have to further cut funding for universities, the report will increase the pressure on Mr Cable and Mr Willetts.

Mr Byrne said: “We need to know fast how ministers got it so wrong, and how they’re going to fix it without putting the Britain’s scientists, students and colleges under threat.” 

He added: “Worse of all, we may be at the point where so many students loans are being written off, that the government’s new student finance system is actually more expensive than the old arrangements, even though the government is asking students for three times as much money. You couldn’t make it up.”

Following the rise in fees to £9,000 under the coalition government, the value of outstanding loans is projected to rise from £46 billion in 2013 to £200 billion by 2043 (in 2013 prices), the NAO says.

“Until BIS has a robust strategy for maximising collection, improves its information on borrowers, and can more accurately forecast how much should be collected each year, it is not well placed to secure value for money,” the report warns.

It adds: “BIS urgently needs to understand how the loan book is performing and how it will perform, when the value of loans is projected to increase substantially.”

Recommendations for BIS include publishing “a transparent and readily understandable forecast for the amount it expects to be collected each year and [reporting] on any variance”; and doing more to collect repayments from the 14,000 borrowers living overseas who are “currently behind in their loan repayments”.

The NAO also warns that BIS assumptions on future graduate earnings growth – which underpin its forecasts on the RAB charge – “may be optimistic”.

BIS’ model also “assumes that earnings growth is uniform throughout the earnings distribution, but evidence indicates that earnings growth is higher for higher earners, and varies depending on subject studied or university attended,” the NAO says.

A BIS spokesman said: “The report demonstrates that there is an effective and efficient process resulting in high collection rates at a low cost which we believe demonstrates good value for money.

“We need to ensure that all borrowers who are earning over the relevant payment threshold are repaying their loans including those who have moved overseas after leaving their course. We are continually improving the collection process for borrowers and we will carefully consider the NAO’s recommendations as part of this programme.”

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