The proposals, originally due to be implemented this October, had already been delayed for a year because of problems in arranging the deal.
Now financial institutions will be invited to "buy" part of the existing debt and the administration of the existing loans scheme could be contracted out. Students will still be able to take out loans on exactly the same basis as before.
Ministers had hoped that in future the banks would take on much of the cost of running student loans, but the banks were initially sceptical about the idea. Barclays, The Clydesdale Bank and National Home Loans did eventually bid for the contract, and had been expecting an announcement at the end of July. Yesterday they said they were shocked and disappointed at the Government's change of heart.
Last night some of those involved speculated that the banks might have been demanding more guarantees than were on offer. The Government tried to set up a loans scheme involving the banks seven years ago, but on that occasion they pulled out.
Making the announcement Gillian Shephard, Secretary of State for Education and Employment, said that pounds 2bn in outstanding loans had built up since the scheme was launched in 1990. The Government aimed to transfer the financial risk from the scheme to the private sector, but it was hard to identify in advance how such changes could come about.
"We have concluded that in the immediate future our long-term goals can best be achieved through the sale of part of the existing student debt and the strategic contracting out of the administrative work of the Student Loans Company," she said.
The existing loans company is wholly owned by the Government and funded by the Treasury. The twin-track scheme would have given students the choice of a government loan or one on the same terms from a bank.
Last night the loans company's chief executive, Colin Ward, said the failure to strike a deal reflected the efficiency with which it was able to do the job.
"Our cost-effectiveness had to be matched, and obviously the banks haven't been able to reach a deal with the Government. We take a positive feeling from that, and it is our intention to continue with our extensive programmes to increase that efficiency," he said.
A spokesman for Barclays said the bank was disappointed by the decision.
"We believe our proposals would have brought benefits to students in terms of quicker turn-round time on application, improved access through our 2,000 branches and faster availability of funds," he said.Reuse content