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Government may encourage applicants to seek banks’ help to pay for university places Students will be encouraged to borrow from high-street banks to cover their tuition fees, under proposals considered by the government as a way out of the funding crisis facing higher education. With more universities than expected charging the maximum of £9,000 a year for tuition, universities minister David Willetts is seeking a way to reduce the liabilities of the government-backed Student Loans Company by turning to the UK’s major banks to provide loans at preferable rates. Universities UK, which represents universities, has been consulted. Its president, Sir Steve Smith, who is vice-chancellor of Exeter University, said the proposal to allow banks to exploit the student market carried huge risks and could create a two-tier education system. He said the Department for Business Innovation and Skills had proposed that students taking private loans would be counted outside the allotment of places each university is given by the government, making them attractive to colleges aiming to increase their cash flow. Smith said the consequent risk of a two-tier higher education system had “nasty” implications. “They [the government] have talked to us about that, but the trouble is that it has the obvious objection that it looks awfully like those people buying their way in.” Smith, who said be had been in talks with several banks over the issue, added: “The trouble is that it is really difficult to come up with a system that doesn’t make it really difficult for people who attend less high-ranking institutions where the students don’t earn the money [to repay the loans].” The Observer understands that Willetts held talks with Spanish bank Santander last month over private student loans, an issue which threatens to embarrass the minister as he prepares to unveil his delayed white paper on the future of higher education. Last month Willetts was forced to defend himself from accusations that he was favouring the rich when he suggested that students who missed out on a place at the university of their choice after 2012 would still be able to attend the course if they paid up front. Banks are keen to recruit students as clients because they tend to stay loyal as they become more wealthy. A spokesman for Santander, Carlos Leira, said the bank was “very keen” on developing its discussions with the government. He said: “You are absolutely right that Santander has been in talks with David Willetts because we are very keen on developing sensible banking for students. “There is nothing set in stone yet, we are looking at different possibilities. We do have a loan at the moment for MBA students, but that is a tiny bit of what we want to do.” Smith said banks would only become involved if either the government or, more likely, the universities accepted liability for unpaid loans. He added: “Banks are interested only if the university takes the risk, the government takes the risk, or they do it only for a select few institutions. So you can imagine 10 institutions where the returns could be high, they could do a really good deal for our students.” The government has an estimated £1bn black hole in its finances following the decision by most universities to charge the maximum tuition fees. Shadow universities minister Gareth Thomas said the latest policy proposal was born out of desperation. “It’s now even clearer that the huge hole in the government’s higher education budget is driving policy on universities, as ministers look at ever more madcap plans to plug their funding gap,” he said. “I am all for more private finance in public services, but the banks deciding who gets a student loan or not is a recipe for a two-tier university system, helping a few lucky ones while leaving the majority to fend for themselves and quite clearly it hasn’t been thought through.” More controversial proposals will be aired next week. At present, universities are restricted to a quota of undergraduates in each intake and fined if they go beyond this. The government is expected to allow them to exceed quotas if they recruit the additional numbers from students who achieve grades AAB or higher at A-level in response to the outcry over high-attaining A-level pupils failing to get a place at their favoured university. University funding David Willetts Higher education Daniel Boffey guardian.co.uk