Academics, students and Liberal Democrats claim the Conservative Party's plan to "privatise" universities would mean graduates paying 13 per cent interest on their student loan debts.
The Tory proposal to endow universities, part-funded by selling student loan debt to the private sector, is dubbed "the most dangerous higher education policy in a generation" by the Association of University Teachers and the National Union of Students.
AUT general secretary David Triesman said: "There is a campus coalition that understands the reality of Conservative proposals to privatise higher education. Increasing student hardship and continuing unrest by staff about pay and conditions would only be heightened by freeing up universities in the private sector."
The Conservatives propose to hand universities one-off endowments, of about £1 billion for a medium to large university, freeing them from reliance on the state for teaching funding and the bureaucracy associated with such teaching grants. To endow the sector could cost up to £100 billion. Much of the money would come from the sale of publicly owned telecommunications frequencies.
But the Conservatives have also calculated that some £1.6 billion a year could be raised for endowing universities by selling student loan debt to the private sector. The Tories say this means loans would have to bear a higher rate of interest, of perhaps 5 per cent above the inflation-pegged level, to make them saleable.
The Treasury discounts the loan debt book heavily to compensate purchasers for the lack of a market interest rate and restricted profit. Higher interest rates would mean a better return to the Treasury, argue the Conservatives.
The extra financial burden on graduates, imposed by higher interest rates, would be limited by doubling the £10,000 income threshold for repayments and offering tax relief to graduates repaying their loans, they say.
But the Liberal Democrats argue that Treasury figures show that, under Tory proposals, the interest rate on loans would have to be raised to 13 per cent to meet the annual cost of doubling the repayment threshold.
They say that funding a £20,000 repayment threshold could cost £1 billion a year by 2020.
The NUS claims that 13 per cent interest could mean a student graduating ith a £10,680 debt would end up owing more than £40,000 if it took them ten years to reach the £20,000 threshold due to accumulated interest.
Shadow education secretary Theresa May said the Conservative policy was radical and innovative. "We are not talking about a 13 per cent interest rate but about 4 or 5 per cent above inflation, or about 7 per cent. I think such scaremongering is irresponsible," she said.
Vice-chancellors are taking the Tory policy seriously. It was included as an option in the Taylor report, which said endowments offered universities greater autonomy and independence.