The plan would save money by making students repay their loans by deductions through the national insurance system rather than directly to the Government's Student Loan Company, as at present.
The private sector, rather than government, would provide a pool of cash to fund student loans. This would remove the Treasury-imposed ceiling on the number and value of advances offered to students.
This in turn could help finance an increase in the numbers going into higher education, and might allow loans to help pay for any 'top- up' increases in tuition fees.
Renewed ministerial interest in such a scheme follows publication of a joint paper by the London School of Economics and BP, Funding Higher Education, which advocates reform of the system. Dr John Ashworth, director of the LSE, has commended the plan to ministers and discussed it in detail with the Chief Secretary to the Treasury, Michael Portillo.
With John Patten's tenure as Secretary of State for Education likely to end in this week's Cabinet reshuffle, the Treasury may be preparing to press the scheme on his successor.
The education department reviewed the system last year and rejected fundamental changes. However, ministers and officials are in regular contact with the Treasury and appear not to be ruling out changes.
The maximum student loan in the coming year is pounds 1,375 in London, pounds 1,150 elsewhere, and pounds 915 for those living at home, with interest at the current rate of inflation. Repayment can be deferred if the graduate is unemployed or earning less than around pounds 14,000.
The Student Loan Company estimates that payments have been made to 370,000 students - more than half the number presently in full-time, higher education.
At present, students repay government-funded loans directly to the Student Loan Company. Under the LSE plan, the loans would be offered by the private sector. The Government would set aside around 20 per cent of the total for possible defaults - a low estimate because of the difficulty of evading the national insurance system. The Student Loan Company would be used to aggregate the monthly payments.
Kenneth Baker, who set up the current system, rejected the LSE model because he believed it would appear to the public to be more like a tax than a loan. However, he later changed his mind and now supports a national insurance-based system.Reuse content