Private colleges' £5m overseas students 'funding error'
The public spending watchdog has warned of a lack of funding controls for overseas students at private colleges, with £5m paid to ineligible students.
The National Audit Office investigated a surge in claims for loans and grants, many from Romanian students.
The Department for Business, Innovation and Skills has already stopped recruitment at 23 colleges.
Margaret Hodge, who chairs the Public Accounts Committee, said such funding should not go for "private gain".
She said the drive to expand the number of private colleges in higher education was not accompanied by adequate checks to protect public funds.
The numbers of publicly-funded students at private colleges soared by 650% in three years.
"This extraordinary rate of expansion, high drop-out rates, and warnings from within the sector ought to have set alarm bells ringing," said Mrs Hodge, chairwoman of the parliamentary spending watchdog.
The National Audit Office, the independent auditor of public spending, has examined concerns over financial support for European Union students at some private higher education colleges.
The business department had suspended payments at 23 colleges after "unusual patterns" in applications.
More than 80% of new students at some colleges were from Romania or Bulgaria, there were multiple applications from a single household and applications made in bulk, such as 50 a day sent from a single internet address.
There are about 140 private colleges which do not receive money from the higher education funding councils, but where students can access financial support.
This includes students from the European Union resident in the UK - with students able to claim more than £7,000 in a loan and more than £3,000 in a non-repayable, means-tested maintenance grant. The colleges would receive up to £6,000 in a tuition fee loan.
The report says that when financial support for about 11,000 EU students was reviewed, about half could not show evidence that they were properly eligible.
There was particular concern that 83% of applicants were for only 16 colleges.
An estimated £5.4m had been paid to 992 ineligible students, before payments were suspended.
The Student Loans Company said: "The process to recover these funds is ongoing. The figure in the report has substantially reduced and is now less than £4m.
"This figure will reduce further in the coming months and we expect to have recovered overpayments from these alternative providers by February 2015."
The report highlights that among students taking Higher National qualifications in 2012-13, about a fifth were never even registered for a course with an awarding body.
There were concerns about drop-out rates at some of these colleges, many times higher than the higher education average.
The UCU lecturers' union said the report demonstrated the lack of financial control in the push for more private provision.
"While we are pleased the misuse of public funds is finally being brought to light, we remain angry that it took so long to happen. We raised the issues of for-profit colleges' access to taxpayers' money time and again with ministers, but we were ignored at every turn," said the union's general secretary, Sally Hunt.
A spokesman for the Business, Innovation and Skills (BIS) department said: "We will continue to investigate and take robust action against any provider failing to meet the high standards expected of them."
For the current year, he said that BIS had introduced controls to limit the expansion of these colleges, known as "alternative providers".
"As the NAO report notes we have implemented new controls to ensure that there is a clear register of designated courses.
"The drop-out rates at a small number of alternative providers have been higher than the average amongst alternative providers. The NAO have made a helpful recommendation on drop-out rates which we will consider as part of our ongoing strengthening of the regulation of the network."