Students face charge on loans

University undergraduates could be charged commercial interest rates on student loans, currently interest-free.

But students would be able to borrow more to get through their studies under proposals by the Secretary of State for Education, Charles Clarke, being considered ahead of the publication of a long-awaited review of higher education early next year.

Rather than paying them back without interest, as now, once they start earning £10,000 or more, students would be charged the prevailing interest rate on loans to be paid back when their salary had reached around £20,000.

The proposal, an alternative to the controversial "top-up fees" plan, is seen as "more acceptable to the Labour Party", one minister said.

"They've long felt that the system actually subsidises rich families who take out student loans to count it off against their own money."

The interest rate rise has already won the backing of an all-party committee of MPs, which – citing expert evidence – claimed it could potentially raise £800m for the struggling higher education sector. But the plan may founder if it cannot be proven to pass the public opinion test among the voters of middle Britain.

The Prime Minister, Tony Blair, has already been warned that the top-up fees plan, as well as potentially creating an elite band of top universities able to charge as they pleased, would not win favour with the middle classes. Significantly, Mr Clarke insisted last week that the Prime Minister was "not wedded" to the idea, opening up the field for some form of graduate tax, as proposed by Chancellor, Gordon Brown.

Mr Blair has also been stung by criticism of the top-up fees proposal by other Cabinet ministers, including Clare Short and David Blunkett. The higher education trade unions are also opposed to the idea.

The bulk of opinion now seems to be rallying behind an idea that would require students to pay for their university education after they had graduated rather than before.

The benefit of this scheme, its advocates say, is that the system is already in place. At present students pay £1,100 in tuition fees unless their parents earn less than £20,480, and interest-free loans of £3,905, or £4,815 for those studying in London, are available each year.

Up to 75 per cent of the total loan is available to every student regardless of their background, and the rest is means tested. It is paid back over a long period when the graduate is earning £10,000 or more. It is not tax deductible.

But the system, established in 1990, is no longer workable, critics insist. Yet it could be a useful base for a new system that would bring more, much needed, money into the universities.

A source at the Department for Education and Skills (DfES) said this was being looked at as "one way of looking at a graduate tax" and "one by which you could establish a fairer system". The DfES has warned that no decisions have yet been taken.

The Government faces a tricky task of meeting its 2010 goal to get 50 per cent of young people into higher education while providing sufficient funding for an overstretched and neglected higher education sector.

Ministers have made it clear that parents and students can no longer expect the taxpayer to foot the bill for an education which they claim leads to significant financial rewards later in life.