Government proposals for ÖйúAƬ funding may have underestimated the cost to the taxpayer of increased student loans by making "optimistic" predictions about graduates' future income.

Analysis by the ÖйúAƬ Policy Institute of data released by the Department for Business, Innovation and Skills shows forecasts for the amount of loan repayment could be undermined by statistical assumptions.

As a result, the new system could place a bigger burden on future taxpayers due to large sums of unpaid debt being written off as graduates reach the 30-year limit for repayment.

Hepi warns that a greater drain on the public purse compared with the current arrangements may force the government to keep a strict cap on student numbers.

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Its analysis - backed up in separate work by Million+, which represents many post-1992 universities - comes after the coalition's proposals to create a twin cap on tuition fees of ?6,000 and ?9,000.

Institutions charging more than ?6,000 will be subject to "stringent" agreements on widening participation and David Willetts, the universities minister, said the upper limit would apply only in "exceptional circumstances".

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However, an initial survey of vice-chancellors by Times ÖйúAƬ (see below) indicates that most universities are planning to exceed the lower cap. Higher fees would put further pressure on loan subsidies, which are measured in the government books by the Resource Accounting and Budgeting charge - the cost to the taxpayer of favourable interest rates and the write-off of debt.

Hepi's report says the government may have wrongly estimated the RAB charge in its modelling, leading to savings being "lower than expected" in the long term. "Far from saving, there may even be a cost to the government," it adds.

It argues that "optimistic" outcomes of the government's model included a prediction that average graduate earnings for men would increase to ?99,500 a year - in real terms - by 2046. Hepi says this appeared to be based on poor assumptions, including an equal split between male and female graduates.

Million+ said its early assessment of the data also indicated that the government's modelling had made strange assumptions. Pam Tatlow, its chief executive, said: "Not only do they appear to assume that there will be an even split between male and female graduates but they over-estimate what women earn by 15 to 20 per cent."

Hepi says its findings raise serious questions about the government's reforms and whether it will be possible to allow competition for students among institutions.

"Student numbers will have to be constrained as long as there is a public cost for every student that is recruited. That is a conundrum that the government has not yet resolved but which is critical for the coherence of the philosophical justification for its proposals," says Hepi's report, The Government's Proposals for ÖйúAƬ Funding and Student Finance - an Analysis.

It adds that switching taxpayer-funding to loans helped remove money from current expenditure, so reducing the deficit. "It is smoke and mirrors, and it provides an extraordinary reason for changing the whole basis for the financing and organisation of the university system," the report says.

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John Denham, Labour shadow business secretary, who had put pressure on the government to release details of its modelling, said it was becoming "increasingly clear" that policy was being driven by ideology rather than by a need to tackle the deficit.

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simon.baker@tsleducation.com