The education secretary has asked counter-fraud experts to lead an investigation into reports millions of pounds in student loans are being claimed by people with no intent to study.
It follows a report in the Sunday Times which says it found evidence of some individuals enrolling on degree courses at small colleges just to access loans, with no intention of paying them back.
Bridget Phillipson has called in the Public Sector Fraud Authority (PSFA) to coordinate the government’s response to the allegations and to support investigations already under way.
Writing in the Sunday Times, she said it pointed to “one of the biggest financial scandals in the history of our universities sector”.
The newspaper said most of the students under scrutiny are believed to be at franchised universities – small colleges paid to provide courses for established universities.
It claimed there is a concern about the potential “organised recruitment” of Romanian nationals in particular to enrol on courses.
Student Loans Company (SLC) also identified suspicious applications involving fake documents and address duplication, along with franchised colleges enrolling students who can not speak adequate English, the paper said.
Phillipson said SLC had been working with law-enforcement agencies to investigate the prevalence of some Romanian students at certain colleges, but not enough was being done to stop wider abuse.
“But today’s revelations demand that we must go further and faster to protect the public purse.
“I will not tolerate a penny of taxpayers’ money being misused,” she wrote.
She added franchising in some universities had been “less about expanding access and more about meeting expanding overheads”, and the Office for Students (OfS) – the independent regulator of higher education in England – should have provided “guardrails” in this area.
Ms Phillipson said she plans to bring forward legislation to ensure the OfS has new powers to protect public money.
The UK’s student loan debt currently stands at £236.2bn.
Students, including overseas students with settled status, can take out government-subsidised loans to help towards their maintenance costs and to cover the cost of tuition fees.
The tuition fees are paid directly to a university or education provider, while the maintenance loan is paid directly to a student’s bank account in instalments.
Students need to repay their loan but not until they earn a certain amount after graduation – with the amounts currently ranging from £24,990 to £31,395 depending on which part of the UK they are based.
In England, the loans are eventually written off after 40 years.
The Public Sector Fraud Authority is part of the Cabinet Office and Treasury and works with the government and public bodies on reducing fraud.
The Department for Education said in a statement it had already taken action to crack down on rogue franchise operators to tackle fraud and it would “overhaul regulation” so the OfS better protected taxpayer money.
A spokesperson said: “Where misuse or fraud is found we have powers to claw back payments – and we won’t hesitate to use them.
“We will bring in tough new laws to ensure the OfS can quickly stop bad actors gaming the system once and for all.”
OfS chief executive Susan Lapworth said the “sharp practices” alleged in the Sunday Times investigation were “entirely unacceptable” and “represent shocking misuse of public funding”.
She added OfS would work with the education department and SLC to address the issues.
Universities UK – which represents 141 universities – said it supported the government’s proposal to require franchise partners to register with OfS.
“If there is evidence of criminal behaviour, we completely agree that it must be rooted out,” said a spokesman, adding that universities had taken “extensive actions to tighten controls” over the last two years.
He added: “We should also remember the legitimate and important role of some franchise provision in meeting the needs of students for whom the traditional model of higher education may be difficult to fit around work commitments, or where study closer to home is essential.”
