The Chancellor yesterday announced plans to privatise part of the student loans system to fund public service reforms.

The Chancellor yesterday announced plans to privatise part of the student loans system to fund public service reforms.

Under the move, £6bn owed to the Student Loans Company will be sold to banks or building societies. At the end of March, the total value of student loans was £16bn.

Teachers' and students' representatives expressed fears over the plan.

The advantage to the Treasury is that investors will pay a lump sum immediately - graduates' repayments are made over many years.

That would immediately allow lower government debt, ease the Chancellor's constraints from budgetary rules, and allow him to meet his manifesto commitment to raise spending on education faster than the growth of the economy.

For banks, pension funds and other investors, buying student debt gives them a steady long-term income from graduates guaranteed by the government and collected by the Inland Revenue from pay packets.

Defaults are expected to be rare, though graduates have been slower to start repaying than ministers hoped.

However, following the announcement, unions representing university lecturers said students must not be forced to pay commercial interest rates for their loans in future. The National Union of Students also expressed concerns over the move.

Sally Hunt, general secretary of the University and College Union, said: "This appears to be a short-term strategy as the government will ultimately lose money in the from repaid debts.

"We need assurances from government that the money raised will be ploughed back into higher education and not used to replace public funding. Furthermore, as students are forced to borrow more to meet the cost of their university education, we need a guarantee that the interest rate on student loans will not rise."

The National Union of Students warned that selling the student loans book could mean private firms charging students commercial interest rates in future.

NUS president Gemma Tumelty said: "We wait with some concern to see more details of how the £6bn raised from the proposed sale of student loan debt will be spent."

Nationwide Building Society and Royal Bank of Scotland have been seen as front runners to buy the student debts - both have done so previously.

Students in higher education can borrow up to £6170 a year for maintenance, at an inflation-linked interest rate - currently 2.4%. They pay the money back once they start earning £15,000 a year or more.

From last September, loans have also been available to cover university tuition fees.