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Graduates who pay off their loans early may face penalty

Plans to allow universities to set their own fees will see the country's most selective universities raising them to as much as £12,000 a year – with weak institutions going to the wall, it emerged last night.

The proposals were given the blessing of the Business Secretary Vince Cable in the Commons yesterday despite all 57 Liberal Democrat MPs signing a petition during the election to vote against fee rises. He told MPs the package was "fair and affordable" and his earlier opposition to rises "no longer feasible". He also promised to close a loophole allowing high-earning graduates to see their debts off quickly, which would have resulted in them paying less than their poorer counterparts, who would have to spread their repayments over 30 years. He is considering charging a fee for paying off loan debts early.

The long-awaited committee of inquiry into student finance by the former BP boss Lord Browne also recommended scrapping the current £3,290 cap on student fees. Instead, universities will be free to charge what they like – although they will have to pay a levy to the Government if they exceed £6,000 a year.

The proposals provoked an outcry last night, with warnings that students could land themselves with debts of more than £100,000 after graduating from their five-year courses.

The British Medical Association warned: "Graduates are currently leaving medical school with an estimated £37,000 worth of debt under the present £3,290 annual fee. There is the potential that some students could incur debts up to and beyond £100,0000 if fees are set at £10,000 or above by medical schools."

Most universities are expected to charge between £6,000 and £7,000 a year, vice-chancellors indicated. That will mean the average students leaving university after three years with debts of £30,000 to repay an £6,000 a year fees loan and £3,750 maintenance loan (up from £2,960 at present) to cover living costs.

The highest fees are likely to be levied by Oxford, Cambridge, Imperial College London and University College London – which could vary fees according to subjects. Those wanting to study sought-after courses such as law are likely to be the ones facing maximum charges. A report by the education charity the Sutton Trust has predicted that fees could eventually rise to as much as £15,000 a year.

However, institutions such as the University of East London (UEL) – which attracts a large number of ethnic-minority students from disadvantaged backgrounds and other inner-city former polytechnics are facing what they describe as a "nightmare dilemma" of having to raise fees to offset cuts in government funding and risk losing hundreds of students.

Professor Patrick McGhee, vice-principal of UEL, said its work in recruiting students "could be undone overnight". Lord Browne's report bluntly warns: "In a more competitive environment, some institutions will be more successful at attracting students than others. This means that some institutions may be at risk of failing."

Higher-education watchdogs will, as a result, be given powers to explore mergers or even insist that failing institutions are taken over. Speaking to The Independent about university closures, Lord Browne said: "We have to take into account the possibility. If an institution is going to fail there will be early warning signs."

He acknowledged there were some "weak" institutions which could face difficulties. On fee levels, he said he was "confident there would be a range of charges". "It won't all be upwards [of £6,000]," he added. "There will be some downwards movement, too."

Last night Sally Hunt, the general secretary of the University and College Union, condemned the proposals, saying: "Lord Browne's recommendations... represent the final nail in the coffin for affordable higher education. His proposals will make our public degrees the most expensive in the world and price the next generation out of education."

Aaron Porter, the president of the National Union of Students, said that graduates would be shouldered with "crippling" debts and universities faced with "devastation". Lord Browne responded by saying that the 20 per cent of lowest earning graduates would actually be paying less under his proposal – with the threshold to trigger repayments being raised to £21,000 a year.

However, an analysis by the Social Market Foundation said students able to pay up front and avoid a loan could pay as much as £12,000 less than a middle-income graduate. It was this that prompted Mr Cable's pledge to consider a charge for early repayment.

Lord Browne's report was backed by Dr Wendy Piatt, the director general of the Russell Group, which represents 20 of the leading UK research institutions including Oxford and Cambridge. "Unless we ask graduates to make a bigger contribution, they – as well as society as a whole – will be short-changed," she said. "This is the stark choice the country has to wrestle with."

Lord Browne's recommendations

* The £3,290 a year cap on student fees should be scrapped – and universities should be free to charge what they like.

* If they charge more than £6,000 a year, they should pay a levy to the Government to meet the cost of loans. They would keep a diminishing proportion of the fee (94 per cent for £7,000, 89 per cent for £8,000 and so on).

* A maintenance grant of up to £3,250 should be made available for students whose family earnings are less than £60,000 a year (currently £2,906).

* A maintenance loan of £3,750 should be available to students who want one.

* State funding should be retained at its present level to subsidise courses in science, technology, medicine, nursing and languages.

* Graduates should start repaying loans once they earn £21,000 (instead of £15,000).

* Any outstanding debt should be written off after 30 years instead of 25.

* Interest rates should be charged on loans in line with the cost of borrowing to the Government.

* Part-time students should be eligible for loans for the first time.

* Universities charging more than £7,000 should face increased scrutiny to ensure they do not discriminate against poorer students.

* The number of university places should be increased by 10 per cent in three years.

* Teaching grants to universities should rise by 80 per cent.