Private higher education institutions will be able to claim public support from 2000 following a government review.
But the plans have come under fire from both public and private institutions, fearful of losing their distinct advantages.
Although public funding is already available for students on designated courses in private higher education colleges, the institutions do not receive funding from the Higher Education Funding Council for England.
The Department for Education and Employment has told private institutions that it will offer them three options for institutional funding from 2000-01.
To qualify for HEFCE funding, private institutions, which meet certain course criteria, will be able to do one of the following:
* Request designation to receive public funding directly from HEFCE as long as at least 55 per cent of their full-time enrolment follows higher education courses
* Merge with a publicly funded institution
* Form a link with an existing institution and have its courses validated by that institution.
A private college picking any of the three options would have the same funding for students as its public counterparts.
Present arrangements will continue for institutions which do not wish, or are unable, to pursue one of these options.
The Council for Independent Colleges and Research Institutions has already approached the DfEE to subsidise private HE.
But its chairman, Marcel van Miert, director of the private European Business School, said the proposals were "not helpful".
"Most of us do not want to merge with these humungus dinosaurs of institutions," he said.
"You can't, as a small college, expect to have an important say in a university that has got 10,000 students," he said.
Mr van Miert said many private colleges were already being "unfairly competed against by the government" because the public sector was now offering courses that used to be in the private sector arena alone - for example, osteopathy and chiropody.
Heads of publicly funded institutions suggested the proposals could be part of attempts to "tidy up" higher education and questioned whether the sector could be organised that easily.
Roger Brown, principal of publicly funded Southampton Institute, said the plans smacked of "back-door rationalisation".
Dr Brown said he opposed privately funded institutions receiving public grants "on principle". Any HEFCE money going to private institutions could reduce the share to the public sector, he said.
Martin Gaskell, rector of publicly funded University College, Northampton, said: "If the funding council is putting public monies into this, then these institutions would have to accept the responsibilities that go with that, on quality, public disclosures of statistics and so on."
Patricia Ambrose, executive secretary of the Standing Conference of Principals, which has not been consulted over the plans, said: "We would expect such institutions to meet the same quality criteria and mechanisms that other publicly funded institutions have to do.
"There may also be an issue for the funding councils if they are funding institutions which are making substantial profits."