Enforced payment of the minimum wage to interns from the US could cost the UK economy millions and tarnish London's reputation as the place to be for overseas students, it was claimed this week.
Data from the Association of American Study Abroad Programmes UK show that 25 of the association's 64 members spent a total of £17 million in the UK to bring over 6,405 students, of whom 1,220 had unpaid work placements.
The AASAP/UK represents about one-third of the universities and colleges that operate study-abroad programmes in the US.
Bill Sheasgreen, chair of the AASAP/UK, which has been pushing for the minimum-wage exemption to be extended to its students, told The THES : "US universities have been operating unpaid work placements in the UK for at least 30 years.
"Most firms recognise the work placement as part of a degree programme and will be most reluctant to pay. Some cannot afford to pay."
He added: "If the legislation is rigorously enforced, then many of our programmes might have to shut down."
Earlier this year, the Home Office warned US schools that operate in the UK that the minimum wage of £3.80-£4.50 an hour would apply to the thousands of US students who spend part of their academic programme in the UK and undertake a related unpaid internship.
The Home Office letter was quickly withdrawn pending further consultations.
But a consultation exercise on the minimum wage was completed at the end of October, and an exemption for overseas student interns, which officials believe would be difficult to police, is unlikely.
A spokesman for the Department of Trade and Industry, which is responsible for minimum wage legislation, said: "Any change in the law would require primary legislation.
"Our concern is that any system of exemption would be open to exploitation and very hard to police.
"There is, however, an exemption available to students on UK courses."
He said that the DTI was prepared to talk to the US embassy about the issue.
The UK is seen as a market leader in offering internships, with students flocking to take up unpaid work placements with private companies as well as political parties, museums, galleries and non-government organisations.
But next week's annual Open Doors report by the Instituteof International Education in Washington is expected to show that Italy, Spain and Australia continue to erode the UK's lead.
Mr Sheasgreen added: "As one of our advantages in the UK is the possibility of doing a work placement, the implementation of the minimum wage legislation would no doubt be a big blow."