Plans for a twin-track student loans system, where private banks could offer cash in competition with the Student Loans Company, have been abandoned.
The move comes as Conservative MP and former higher education minister George Walden says in a book out next week that there is tacit collusion between the two main political parties to keep the truth about the poor state of universities from the public. "The money our universities need must come from parents or students, probably the latter in the form of a graduate tax," he says.
Gillian Shephard, education and employment secretary, said this week that part of the existing student loan debt of Pounds 2 billion would be sold off and the administrative work of the SLC contracted out. "We believe this will pave the way for private sector lenders to take on the responsibility for the provision of student loans," she said.
Barclays Bank, Clydesdale Bank and NHL (National Home Loans) had submitted bids for the twin-track scheme, but Mrs Shephard said negotiations with institutions in recent months did not produce an acceptable deal. Mrs Shephard said that selling some of the debt would bring benefits by transferring risk to the private sector. She also insisted that students would continue to get loans on the same terms and be able to repay or defer as normal.
The DFEE said that advisers would be appointed this week to seek the best way of selling the debt.
The Education (Student Loans) Bill, which received Royal Assent on April 29, remains in effect.
The Labour Party said the abandonment of the twin-track scheme represented a complete collapse of the loans system. Lecturer and student unions also said the move was a Government failure. The Committee of Vice Chancellors and Principals said: "We are not very concerned with who offers student loans and ends up owning the debt - as long as students are not disadvantaged."
Bryan Davies, shadow higher education minister, said the legislation for the original idea was rushed through Parliament before it had been accepted by the private sector.
Don Foster, Liberal Democrat education and employment spokesman, said the transfer of loan debt to the private sector must be of long-term benefit to both studetns and tax-payers. Although the party had no objections in principle "the devil may be in the detail", he said.
"There is a clear danger of tax-cut bribes delivered to the long-term detriment of students," Mr Foster said. He called for guarantees of transparent negotiations, a tight regulatory sytem and equal terms for all students.
Douglas Trainer, president of the National Union of Students, said the move was not in the best interests of students and would lead to the collapse of the SLC. He called for a Government commitment to ensure income from the debt sell-off went to student support and higher education funding.
David Triesman, general secretary of the Association of University Teachers, said the SLC had been a "six-year disaster". He said he was less concerned about who provided loans than the five-year repayment period, which the union believed was not long enough.
Gareth Roberts, chairman of the CVCP, said: "The involvement of the private sector could, through better marketing, increase the popularity of loans and release public money for other purposes - like replacing the income lost in the damaging capital cuts introduced in last year's budget."
The CVCP wants the repayment system, where students can defer repayments when their income is below 85 per cent of average earnings, changed to link repayments to pay levels.
A spokesman for Barclays said the bank was disappointed by the decision. He said Barclays believed its proposal would have benefited students by giving faster turn-around on applications and better access through its 2,000 branches.
A Clydesdale spokesperson said the Government had only informed the bank of its decision on Wednesday morning. Neither would comment on the possibility of taking over the student loan debt.
Take-up of student loans, introduced in 1990, has been lower than expected. In 1994/95, just 55 per cent of those eligible took out a loan. The NUS said the Student Loans Company had experienced problems since the start. In 1994, the union said 3,000 students were affected after a new re-application system collapsed.