THE country's main back-up fund to protect overseas students from college collapses has suffered a $2 million reversal to its bottom line in just two years, recording a deficit of $1.3m last year. In a grim development for the overseas student industry, which is already reeling from a string of private college collapses, the latest annual report for the Education Services for Overseas Students Assurance Fund predicts future bad claims totalling $5.4m.

The ESOS fund was "a dead duck", according to a senior industry source who declined to be named.

It is not clear where the funds to cover student payouts from future collapses will come from; however, the estimated figure certainly exceeds the fund's annual revenue of $1.7m raised from mostly reputable providers.

But the ESOS fund appears to have staved off an even worse bottom-line result as it recovered $6.9m in payouts from its former insurer, AIG. AIG was a casualty of the subprime crisis and the ESOS fund manager, PricewaterhouseCoopers, has been unable to find a replacement insurer because of the financial downturn.

The fund paid out $3.4m to 1059 students last year and estimates $2.2m in outstanding claims from the collapse of one provider that defaulted in January last year. This is believed to be the Sydney International College of Business.

Pressure on the fund will mount, given the federal government crackdown on dodgy colleges. The Department of Immigration and Citizenship told the HES this week it had formally investigated six education providers and audited "up to 20 providers of concern".

"These providers will be subject to closer investigation," the department said.

In Victoria the industry is braced for possible closures as the authorities carry out a rapid audit of 17 "high risk" private colleges, representing about 10 per cent of the sector. Two weeks ago the Victorian Registration and Qualifications Authority briefed Melbourne's largest private providers, putting them on notice to be prepared to take in students should any colleges under investigation have to be closed.

"They have opened a dialogue with a number of the larger providers to ensure that we can get a smooth flow of students if any of these colleges have to fold," said Phil Honeywood, marketing manager at one of the largest private colleges, Cambridge International College.

Mr Honeywood said the industry was well positioned to absorb displaced students, helped in particular by the availability of office space in the city in the wake of the economic downturn.

But Melbourne's private providers were already having to absorb 330 students, mainly Indians who had been studying community welfare at the Melbourne International College, which collapsed last week owing more than $400,000.

Staff at MIC are owed about $120,000 in superannuation.

Deb James, secretary of the Victorian Independent Education Union, said the closure of "dodgy" colleges would benefit the whole sector and she believed there were a few such colleges already "on the brink".

"It is an industry where there are some fantastic operators with a long history, but the industry can be a little bit open to fly-by-night business people looking to make a quick buck," she said.