Universities would subsidise the cost of processing new privatised student loans under Government proposals, it emerged this week.

Loan applications already cost higher education institutions Pounds 4 each and the same would apply to loans offered by private lenders, according to tender arrangements the Government is drawing up.

The news came as the Student Loans Bill had its second reading in the Commons. It was greeted with alarm by the Committee of Vice Chancellors and Principals, which is campaigning for institutions to be fully reimbursed for loans administration costs.

The Government has not increased payments of Pounds 4 per loan application to help cover processing since 1991. The CVCP estimates the real cost is more like Pounds 8 per loan.

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A CVCP spokesman said: "It appears we are expected not only to subsidise the Student Loans Company's costs but also those of the high street banks."

The Bill was criticised from all sides during the second reading debate on Monday. Eric Forth, the higher education minister, failed to answer a question from Don Foster, the Liberal Democrat education spokesman, on whether the Government had received an estimate on the amount it would cost to link loan repayments to the National Insurance system - a measure Tory HE consultants believe would make a privatised scheme more attractive to the banks.

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Bryan Davies, Labour's further and higher education spokesman, said: "The Bill is already before Parliament and, therefore, the Government have made a commitment to a policy that the private sector must underwrite."

Robert Jackson, the former higher education minister who saw through the introduction of student loans, said a "major defect" in the Bill was that it did not extend loans to students to pay fees. But he regarded the Bill, with the "relaxation of Treasury doctrine" that it implied, as a step"in fundamentally the right direction".