Banks and other financial institutions will be invited to bid to run a privatised student loan scheme under a government Bill published yesterday.
Ministers hope that in future the banks will take on costs of more than pounds 1bn per year for students' living costs, but last night they were still sceptical about the idea.
The banks have said they will only take part in the new, two-tier system if it is commercially viable. They pulled out of the existing scheme before it started in 1990 because they said they would not make money out of it. Instead, the loans were funded by the Treasury and administered by a company set up for the purpose.
However, ministers now feel that the costs are growing too high and that some alternative must be found.
Figures released earlier this week showed that almost pounds 1.3bn lent to students since 1990 remained unpaid. Of 435,000 graduates with loans, only 204,000 were up to date with payments, while 44,000 were in arrears and 187,000 did not have to pay because they were earning less than 85 per cent of the average wage.
The proportion of students taking out loans has risen to 55 per cent from 28 per cent in 1990, and the average value of each loan has increased from pounds 390 to pounds 1,040. Handing responsibility over to the banks could remove up to pounds 1bn from the public sector borrowing requirement from the next academic year.
Under the new legislation, both the Student Loan Company and up to four banks would offer loans to students at interest rates pegged to inflation. The loan company payments would continue to be covered by the Treasury. The banks would receive a subsidy from the Secretary of State to reimburse them for the interest they would lose.
Bids will be invited from any financial institution which is interested, but it is thought that for the scheme to succeed, at least one of the "big four" high street banks would have to take part.
Announcing the Student Loans Bill, Eric Forth, the higher education minister, said students would benefit from the choice offered by the new system. "The expertise and experience of the private sector would mean a better loans system overall and a better deal for students," he said.
However, the president of the National Union of Students, Jim Murphy, has written to all the banks warning them not to get involved.Reuse content