In the wake of revelations regarding Guildhall College in East London, the University and College Union urged the government to halt its expansion of private providers' access to public funding.
The Department for Business Innovation and Skills last week removed designation from two courses at Guildhall College, meaning its students can no longer access funding from the Student Loans Company (SLC) and in some cases cannot continue with their courses.
A BIS spokeswoman said that since it designated the courses in 2011, 390 students at Guildhall College had obtained fee and/or maintenance loans from the SLC, with the college receiving £734,000 in fees via the SLC, which BIS now plans to recover.
In April, Guildhall College began registering students on the two courses designated by BIS: a higher national diploma in business and an HND in computing and systems development, for which exam board Edexcel gave the college accreditation, the college website says.
BIS said that it and the SLC investigated the college after complaints by students that they were unable to start their courses on the agreed dates, and that they were not registered on the correct courses.
In a statement, the BIS spokeswoman said the college had "deliberately registered significant numbers of students on the course in HND in business when those students were in fact intending to study a course that is not designated for student support".
"In addition, the college confirmed to the SLC that students studying undesignated courses were attending the business courses when in fact they were not," the spokeswoman added. "This triggered payment of tuition fees to the college."
Lawyers acting for the college said they were seeking a judicial review of the decision as it appeared to be "unlawful".
BIS is using the designation process to further its policy of encouraging private providers to compete with universities for students. The number of private college courses designated by BIS increased from 157 in 2009-10 to 228 in 2010-11, and again to 403 in 2011-12.
The BIS spokeswoman said: "Our intention is that a new system will apply to all new providers applying for course designation from the 2013-14 academic year. There will also be a review of existing designations to ensure all providers meet these new requirements."
But Sally Hunt, the UCU general secretary, said: "BIS has been signing what are effectively blank cheques to companies like Guildhall College."
She added: "The government must stop designating any further courses for private providers until there is a proper regulatory system in place, and conduct an immediate and transparent retrospective review of the providers it is currently supporting."
In March, Guildhall College was the subject of an educational oversight inspection by the Quality Assurance Agency.
The college fell short on two out of three criteria. The QAA noted that "there are high referral and low completion rates for the HND business and HND computing programmes".
Under a section headed "good practice", the QAA report said: "The team did not identify any good practice."