Plans to hand greater power and responsibility to the English funding council are a "death warrant" for the self-regulation of higher education and could persuade universities to opt out of the state-funded system.
The warning was made this week after the government published a "technical consultation" that fleshed out proposals to make the Higher Education Funding Council for England the "lead regulator" for the sector and "consumer champion" for students.
Under the plans, Hefce would be given a broad range of powers, including:
• Overseeing the granting of degree-awarding powers and university title
• Entering into a "legally binding agreement" with any institution that wants access to student loans
• The ability to fine universities that fail students
• A remit to report price-fixing and anti-competitive behaviour by institutions to the Office of Fair Trading.
The document also confirms that all universities risked losing both their taught and research degree-awarding powers in extreme cases of quality being compromised.
In return, the government is proposing to liberalise the system by easing restrictions on taught degree-awarding powers and university title, giving all not-for-profits access to teaching grants and considering making it easier for universities to become profit-making companies.
Critics said that the new Hefce powers could threaten institutional autonomy, intensify potential conflicts of interest given its funding role, and reduce the impact of independent bodies such as the Quality Assurance Agency.
Geoffrey Alderman, professor of politics and contemporary history at the University of Buckingham, suggested that some elite universities may consider opting out and finding other ways for their students to borrow money.
"I do wonder if Oxford or Cambridge will say to (the government) in a year or so: 'We are very sorry, but we're not prepared to accept these new arrangements; we will do a deal with the banks.'"
He added that the proposals made the QAA "subservient" to Hefce and called this "the death warrant of self-regulation of higher education" in the UK.
Professor Alderman said: "The QAA is being told: 'You are going to do this and you're going to do that.' Well, am I not correct in thinking that the QAA is a separate legal organisation with its own board of directors?"
Others questioned whether private providers would be put off by the red tape.
Steve Lumby, principal of the privately funded LCA Business School, said the "one-size-fits-all" regulatory proposals risked erecting "significant" barriers to smaller institutions that may want only limited access to student loans.
"If the cost of regulation for the private sector can be kept proportionate to its size and income, then it will be capable of playing its full part," he said.
Another implication of the consultation is that any institution charging more than £9,000 in fees - such as the New College of the Humanities - would have no access to the student loans system.
However, Matt Robb, senior principal at consultants The Parthenon Group, said most commercial colleges would charge less than the cap and would view regulation as the "price of doing business".
"Private businesses often like there to be considerable legislation around quality because...that's a barrier to other people entering willy-nilly and offering any old rubbish," he said.
Carl Lygo, chief executive of for-profit provider BPP, said the crucial test would lie in the way Hefce controlled student numbers, the subject of a separate consultation this winter.
"That's a big issue. If we are restricted as a private provider to a tiny number of undergraduate places, why would we bother participating in the whole system?" he said.
Roger Brown, professor of higher education policy at Liverpool Hope University, said one of his main concerns about the consultation was that it attempted to portray Hefce as independent, which was "probably deliberately misleading".
"It is not independent: it is ultimately a creature of government," he said.
There have been widespread calls for clear rules of engagement to guide Hefce and ministers, with Professor Brown suggesting that its regulatory and funding functions be charged to separate bodies.
Dennis Farrington, visiting Fellow at the Oxford Centre for Higher Education Policy Studies, said the consultation "does not address whether the constitution of Hefce is appropriate to manage these increased responsibilities".
Giving his response to the consultation, which will end on October, Sir Alan Langlands, Hefce's chief executive, said defining the body's relationship with government would be a "crucial element" of the reforms.
"Governors, vice-chancellors and principals are, and must continue to be, the best judges of the way forward for their institutions and students," he said.