Colleges owe £1.6 billion in long-term loans - and mounting financial pressures, combined with the structural overhaul of the sector, could lead to debts continuing to surge, experts have warned.

TES understands that around 12 colleges have been forced to turn to the Skills Funding Agency (SFA) for financial assistance in recent weeks after failing to comply with the terms of their bank loans. Many more have been forced to accept higher interest rates or borrow additional money from other banks or local authorities to manage their debts.

Colleges reported an overall operating deficit of about £60 million in 2014-15, about 1 per cent of their total income, according to the Association of Colleges (AoC). This was the second consecutive year in which the sector as a whole was in deficit.

Renegotiating terms

The AoC has warned that the significant number of college mergers expected to result from the area reviews could lead to banks renegotiating any outstanding loans.

“The banks reserve the right to treat a merged college as a new organisation and to require a new loan application with new terms,” warns an AoC briefing for MPs, seen by TES. “This may not happen in all cases but there is clearly a risk either that colleges end up paying more, diverting resource from students, or that the banks withdraw entirely from some loans.”

According to the AoC, the total value of long-term loans to colleges stands at around £1.6 billion - more than the entire adult education budget (excluding apprenticeships) for 2015-16 (see figures, above).

The briefing suggests that between 10 and 15 mergers are expected to take place this year, with a greater number likely to follow in 2017.

A report by the National Audit Office last summer concluded that the financial health of the FE sector had been declining since 2010-11. “In 2013-14, the sector was in deficit for the first time and 110 colleges recorded an operating deficit, up from 52 in 2010-11. In the same period, the number of colleges assessed by the SFA to have ‘inadequate’ financial health rose from 12 colleges to 29 colleges”, it says.

The warnings came as one prominent leader spoke of colleges in the capital having to remortgage buildings so that they could afford to make staff redundant.

An AoC spokeswoman said that although the spending review settlement for the FE sector had been better than expected, colleges still faced a difficult time financially.

“Funding for the day-to-day running of a college is more stable but sometimes there is a need to spend in areas not covered by this and so borrowing is necessary,” she added. “Colleges that borrow money do so for a significant project, whether that is creating efficiencies such as restructuring or a new building. Their aim is to make sure they are providing the best service they can for their students and their staff, and any loan they take out is an investment in the future.”

Andrew Harden, the University and College Union’s head of FE, said: “The massive reduction in government funding for adult skills has clearly left many colleges in difficult financial circumstances. The government urgently needs to look beyond area reviews and put college funding on a strong and sustainable footing, allowing them to spend resources on supporting students rather than paying down debts.”

‘Unstable’ environment

Policy analyst Mick Fletcher said that the financial pressures in FE had been caused by the “instability of government policy”. He added: “Many colleges took out loans to help invest in new buildings that would enable them to grow and generate more income.

“This was a sensible thing to do until government funding for FE suddenly became much more restricted and business plans now need to be rewritten - in extreme cases colleges may only be able to balance the books by selling off buildings and shrinking the business.”

A Department for Business, Innovation and Skills spokesman said that funding for the FE sector would actually increase in cash terms during the current Parliament: “Through the introduction of the levy and expansion of loans by 2020, the total spending power of the further education sector to support participation will be £3.41 billion, which is a cash terms increase of 40 per cent compared to 2015-16.”

The apprenticeship levy and the expansion of advanced learner loans would extend the existing opportunities for colleges to diversify their income, he added.

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‘We’re like any business’

City and Islington College has announced plans to merge with neighbouring Westminster Kingsway College this summer. Earlier this month, City and Islington principal Sir Frank McLoughlin told the London Assembly Education Panel that his college had already taken action to tackle funding pressures.

“We do all the traditional downsizing things that any business would do,” he said. “So we make staff voluntarily redundant; we’ve managed to do it in my college through voluntary means all the way through. Some colleges have had to make people compulsorily redundant. I’ve heard of colleges in London having to remortgage buildings to pay redundancy fees.

“We look at our estate to see if we can downsize. We also, like any other business, look for opportunities to grow, so we all work with employers [and at] international work or growing our higher education offer.”

This is an article from the 26 February edition of TES. This week’s TES magazine is available in all good newsagents. To download the digital edition, Android users can click here and iOS users can click here

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