Future payments to further education colleges providing degree and sub-degree level courses is under review by the Higher Education Funding Council which next week publishes a report giving the options.

The council questions whether it should continue to fund such courses irrespective of where they are offered.

One option is the formation of a small group of colleges with established higher education provision which would receive special treatment from HEFCE and be allowed to bid for funding for capital projects.

HEFCE is responsible for funding designated courses of higher education in colleges under the terms of the 1992 Further and Higher Education Act.

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But the report, the result of an internal study set up last year with representatives from the Further Education Funding Council, the Higher Education Quality Council and the Department for Education, will question whether colleges should provide higher level courses. It will examine relations between colleges and higher education institutions. The report will also call for interested bodies to comment on whether the council should, for instance, encourage collaboration between universities and colleges through new funding arrangements.

In 1993/94 HEFCE allocated Pounds 26 million in recurrent grant for teaching 32,000 students on graduate, degree and sub-degree courses in 76 FE colleges. Many franchised courses in colleges are also indirectly funded by HEFCE. About 37,000 student places are currently franchised to colleges, validated either by a university or a national validating body, such as BTEC.

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Principals will await the results of the policy review with interest since many are increasingly relying on fee income from degree courses to make up budget shortfalls. Demand for higher level courses is buoyant in many regions, particularly among students from non-traditional backgrounds.