Student Loans

The British Have Their Own Student Loan Mess


(Updates sixth paragraph to include comment from the London School of Science and Technology.)

When the British government opened up its student loan program to private institutions in 2011, Universities and Science Minister David Willetts said the goal was to unleash market forces in a system long dominated by stodgy public universities. Getting access to loans would help private colleges compete for students, he said, encouraging innovation and putting pressure on public institutions to hold down tuition increases.

The forces unleashed, however, weren’t exactly what Willetts had in mind. Reports of alleged abuses by private institutions are proliferating, including a recent investigation by the Guardian of a for-profit college in London that allegedly scooped up millions in loans as it tripled its enrollment with students who were recruited off the streets and rarely attended classes. Staff at additional for-profit schools have complained of similar practices and low educational standards. According to the Guardian, some 40 percent of student-loan recipients at private institutions are foreigners, including a large number of Bulgarians and Romanians.

As enrollment at for-profit schools has surged, the amount of their students’ tuition debt has soared to £175 million ($294 million), fueling an £80 million deficit in the government’s loan fund at the end of 2013. In response, the government ordered 23 of the fastest-growing private schools to temporarily freeze recruitment.

Now, opposition members of Parliament are asking the National Audit Office to investigate. “The government seemed so blinded by the ideology of competition that it refused to heed our warnings and the dire examples from America,” says Sally Hunt, general secretary of the University and College Union, a trade union representing higher-education workers that has joined calls for an investigation.

The situation in Britain sounds familiar to anyone who has followed the growth of for-profit higher education in the U.S. From 2000 to 2010, it mushroomed into a $30 billion-a-year industry largely financed by taxpayers. School recruiters targeted vulnerable populations that included veterans, immigrants, and homeless people who took out federal student loans to finance their education. Most then dropped out and couldn’t repay their debts. Federal and state governments launched a raft of investigations and new regulations on the industry, an effort that continues.

Recalling similar practices in the U.S. a few years ago, the Guardian reported last month that the for-profit London School of Science and Technology had tripled its enrollment since 2011, raking in some £6.5 million in loans for students who “blatantly” lacked qualifications to attend college. Class attendance rates are below 40 percent, the newspaper said, and students refer to the school as “the ATM” because they can receive government loans and grants for their living expenses in addition to the tuition aid provided directly to the school. In a statement provided to Bloomberg Businessweek, the school said that the Guardian’s report contained “factual inaccuracies and distorts the image of a very successful and thriving college.” The school seeks to “widen participation, so that many students who might otherwise not consider a conventional university can find a place to learn within our college,” the statement said.

Debts incurred by students at for-profit schools could weigh more heavily on British taxpayers than on borrowers because of the government’s generous repayment terms. After leaving school, borrowers don’t have to make loan payments as long as they earn less than about $35,000 a year. Those earning more make monthly payments that equal 9 percent of any income over $35,000.

As recently as 1998, British universities charged little or no tuition. Legislation since then has allowed public universities to charge up to £9,000 a year, all of which can be covered by government loans. Students at private institutions, including for-profits, can receive tuition loans of up to £6,000.

Matlack is a Paris correspondent for Bloomberg Businessweek.

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