Organised fraudsters are targeting student loans to make millions of pounds because of a lack of government oversight of the university finance system, according to a new parliamentary report.

The House of Commons’ Public Accounts Committee has identified a “back door” into the student finance system, caused by growing numbers of universities outsourcing courses to commercial partners.

A lack of regulation means that many of these franchises are unregistered by the Office for Students and employ commercial agents to recruit students – a number of them not able to speak English – to enrol on these courses and claim loans.

Conservative MP Sir Geoffrey Clifton-Brown, the committee's deputy chair, said: “A back door into the student loan system for organised fraudsters has been left hanging wide open here by the lack of oversight by government. Fraud involving franchised providers now makes up a little over half of all fraud identified by the Student Loans Company. 

“These issues must be addressed with some urgency, as the use of franchised providers only looks set to grow. Indeed, concerningly the franchising out of education seems to be viewed by some providers as a way of underpinning their finances. The risk to the taxpayer from unchecked fraud is clear, but the systemic risks to the quality of education provided to students must also be taken in hand."

The amount of fraud detected by the Student Loans Company at these franchised institutions was £2.2 million in 2022 – accounting for 53% of all fraud discovered by the company. Yet these franchises account for just 4.7% of the student population in 2021. But the number of places provided by them doubled between 2018 and 2021, from 50,440 to 108,000, and is rapidly growing as more universities makes these financial arrangements.

An investigation by The New York Times last year discovered one provider, Oxford Business College, had been recruiting students who didn’t speak much English and did not have the admission requirements. It paid agents per the number of students recruited. Another agent offered students £500 a time to recruit their friends with no limit on the number of people they recruited.

An investigation by the National Audit Office also discovered that some franchised colleges were taking a big cut on the loans students received – anything between 10 and 30% of the value of the loan. This is equivalent to more than £3,000 for a £9,250 tuition fee loan in the worst cases and meant that less would be spent on teaching the student.

The committee described this as a “shocking” revelation, pointing out that the student would not know if this had happened.

“Because these recruitment practices are unregulated, agents may not make it clear what students get for their money, and there are incentives to recruit student numbers rather than ensuring students enrol on the most suitable courses," the report states.

It is highly critical of the lack of government oversight of these operations. Oversight is currently split between the Department for Education, the Office for Students, and the Student Loan Company.

The Office for Students can set standards for registered franchises, but two-thirds of the providers chose not to register. The Student Loans Company can spot potential fraud, but cannot act to stop it without Department for Education approval. The Department for Education has no guidance on checking whether students obtaining loans are attending the colleges.

A Student Loans Company spokesperson said it took "financial crime seriously" and that it is "working closely" with the Department for Education and Office for Students to "continue to take action to protect public funds wherever possible”.

A spokesperson for the Department for Education said: “All higher education providers in receipt of government funding must provide value for money for the taxpayer and we will not hesitate to act if we see malpractice of any kind.   

"We’re already taking action to crack down on poor quality providers, and we’re making clear that those that use franchising understand their responsibilities and have strengthened our data sharing rules."

It said it is "working closely" with the Office for Students and the Student Loans Company "to identify and prevent any abuses of public funds”.

The chief executive of the Office for Students said it welcomed the report, which "highlights a number of important issues relating to higher education courses delivered through franchise arrangements". 

"Student loan funding provided by taxpayers must be properly protected in these circumstances.  The Office for Students will continue to use its regulatory powers to help ensure value for money for students and taxpayers, and to make sure that universities have effective oversight of courses delivered by their partners.

“Students studying on franchised courses are entitled to expect a high-quality education and positive outcomes, and the Office for Students will place particular emphasis on these partnerships in the next phase of our regulation of quality.

“We will continue to work closely with the Department for Education and the Student Loans Company on these important issues.”