Student loan system is almost financially unworkable, say MPs

The entire student loan system is nearing a point where it is financially unworkable, the group of MPs in charge of scrutinising university policy has found.

In a scathing report, the Commons business committee called for an urgent review of the system, amid predictions the government is heading towards a multibillion-pound black hole in the funding of universities.

There are growing fears among academics about the student loan system, despite unpopular changes in 2011 that involved tripling tuition fees for students. In its inquiry, the committee found that plans to lift a cap on student numbers, funded by selling the student loan book, may make the funding gap worse.

The report will be published just days after the Guardian reported that Vince Cable, the business secretary, had stalled on the sell-off of the student loan book because of fears it would not raise the amount of money predicted. Cable has decided that it will not take place before the general election, although another government could revive the plan after that point. Sources insisted this would not stop Osborne's plan to lift the cap on student numbers, saying this would be funded from elsewhere.

In their report, the MPs questioned whether the sale of the loan book would lead to a good return for the taxpayer, since the government's own analysis has now found it would raise only £2bn rather than the £12bn originally expected by the government with "an unusual and potentially costly deal made to protect the private investor".

Following an inquiry into the whole system, Adrian Bailey, chairman of the Commons committee, said: "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 [the Department for Business, Innovation and Skills] doesn't further undermine the viability of the system by selling off the income-contingent loan book at a knock-down price.

"With the prospect of a large potential black hole in the government's budget figures, the government need 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."

He highlighted a persistent record of inaccurate debt forecasting and a failure to collect student loans effectively that "threatens the continued existence of the current student loans model".

Under the current student loan system for students in England, the government loses about 45p on every £1 it loans out – much higher than the 28% originally predicted.

The committee found a lack of rigour in the collection of student debt, a failure to collect enough from graduates working abroad, and that collection targets set for the Student Loan Company (SLC) by the department were "not fit for purpose".

A spokesman for BIS said it would "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," he said. "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 and that 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."