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The inability of universities to keep track of individual students is becoming a problem for the Student Loans Company, a National Audit Office report reveals.

The report, The Operations of the Student Loans Company Limited, published this week, found little evidence of fraud - of 1.75 million applications handled so far only 422 have been found suspect or ineligible and only Pounds 58,506 has been irrecoverably lost to invalid applicants. But there are difficulties when students drop out: "Institutions say they have difficulty confirming whether students are actually attending their courses. The company has raised this issue with a number of institutions. Most considered it impractical to set up arrangments for monitoring attendance."

This left the onus on individual academics, whose task had been complicated by larger classes, modular courses and multi-site campuses. Only three of nine institutions questioned by NAO could provide a list of their drop-outs in the 1993/95 period. And in one of these, which had 3,200 drop-outs during the two years, analysis of a sample of 129 found that 36 had loans, but only two of these departures had been notified to the company. At another institution ten out of loan-holder departures had not been notified, while a third institution had notified in all cases. The Department for Education and Employment wrote to institutions in August calling for a tightening-up.

The NAO also reports concern that there may be problems keeping in touch with loan-holders who have deferred repayments - 122,000 (45 per cent) of the 269,000 who are now in repayment have deferred.

Long-term deferrals and early death are likely to account for the bulk of irrecoverable debt. Of the Pounds 1,178 million advanced to March 31, 1995, the company estimates that these categories will account for Pounds 1 million, with a further Pounds 15 million lost to defaults. They say these estimates, about 12 per cent of payments, are "inevitably provisional" given the company's short history.

The report, broadly positive about company efficiency, is likely to be used by critics of Government plans for a two-track loans system. It found that adequate precautions had been taken against a repetition of the chaos last year when the new Repeat Applications Procedure ran into problems that prompted the setting up of this inquiry. This led to delays to 35,000 loans and a collapse of the company telephone system, with only 41,000 of 1.14 million telephone calls in November 1994 receiving an answer. This had a knock-on effect on other company work and staff morale. The NAO recently reported that the revised RAP procedure is working well.