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24th February 2014

Government “unrealistic” about student loan repayments

New report says that £80 billion of unpaid debt may be an underestimate

The cost of student loans never to be paid back may have been seriously underestimated by the government.

A new report from the Public Accounts Committee has strongly criticised the government and Student Loans Company’s handling of student debt.

Current figures from the Department of Business, Innovation and Skills calculate the present unrecoverable debt at 35 to 40 per cent, approximately £18 billion.

With the rise in tuition fees to £9,000 a year, it is estimated that by 2042 the unrecoverable debt will be between £70 billion and £80 billion.

However, the Public Accounts Committee have argued that the government consistently underestimates the amount to be paid back from student loans by around 8%, and so the size of the unrecoverable debt may be even larger than government figures suggest.

According to the report, ‘the over-forecast repayments may be due to optimistic assumptions… about future graduate earnings and earnings growth.

‘The forecasts assume, for example, that rates of wage growth seen in the last three decades will continue, despite recent evidence on gradate pay suggesting this may be unrealistic’.

The report also raised concerns over the selling of the student loan book to private companies.

Last November, the government sold £890 million worth of loans to a debt management consortium for just £160 million.

And according to the report, the Department is planning to sell more of the income-contingent loan book to fund lifting the cap on the number of students admitted to universities.

The report says: ‘The Department told us if the sale did not pass the value for money test it would not go ahead.

‘However, the Department has some way to go before it is in a position to make a convincing value for money case’.

It added: ‘The Department needs a reliable and accurate forecasting model so that it can make a sufficiently robust estimate of the loan value in the first place, which it has not yet been able to do with any confidence’.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts said: “the reality is that the Department lacks a robust model to estimate the value of the loans properly.

“The Department must demonstrate that it has a firm grasp upon the real value of the student loan book and the long-term cost to the taxpayer of any early sale”.

The report also reveals that the Student Loans Company has agreed to recommendations that it scrap its premium-rate telephone numbers by April this year.

At the moment, it costs 41 pence per minute to contact the company. While the majority of the profit goes to the line provider, the Student Loan Company earn £78,000 a year from phone calls.

Margaret Hodge said: “Borrowers are still receiving a substandard service.

“They still have to use premium-rate phone lines to contact the Student Loans Company, online services are inadequate, and the IT is no longer fit for purpose”.

The Student Loans Company was also condemned for not doing more to collect loans from those who move overseas after graduation.

In March 2013, the Student Loans Company had no information on 368,000 graduates who were not repaying any of their loans, including not knowing their whereabouts.

The report says: ‘the Department and the Student Loans Company has done little to investigate this group of borrowers.

‘Over three quarters of overdue repayments from borrowers living overseas have been overdue for more than a year’.

Adding to this, Margaret Hodge said that the Student Loans Company “knows very little about British graduates who live abroad or about graduates from the EU who have since left the country.

“Will they ever pay back their loans? The Student Loans Company simply doesn’t know”.

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