The Government's proposals for a new semi-privatised student loans scheme were roundly condemned from all sides and across the political spectrum this week.

Members of the Conservative Higher Education Policy Group joined Labour, student union and university leaders in describing the plans for a twin-track public/private system of subsidised loans, announced in the Queen's speech last week, as "fundamentally flawed".

Tory higher education advisors predicted the Student Loans Bill, which receives its second reading in the House of Commons on Monday, was likely to fall at the first hurdle, scuppering the Policy Group's hopes for a full-blown privatised scheme which might have been extended to all students and saved the public purse up to Pounds 1.8 billion a year.

Even more worrying for ministers, there was no sign this week that the banks were likely to back the scheme. A spokeswoman for Barclays Bank commented: "There are many risks, and we are asking the Government for more details because it is not clear how this scheme can be run commercially."

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The prospects of the scheme being seen as an attractive option for private lenders were diminished further when the National Union of Students warned that privatised loans were likely to be boycotted by the majority of students.

Jim Murphy, NUS president, said: "This new scheme could not possibly interest the banks who refused to support the original proposals for private-backed student loans, and who understand how unpopular this system will be with their student customers."

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Eric Forth, higher education minister, said up to four private lenders might be chosen through a competitive bidding exercise to receive subsidies to offer loans to students on the same preferential terms as those in the current scheme, which would continue to operate alongside the new one. Private loans would be available from the beginning of the next academic year, he said, adding: "In due course we would expect most loans to be private ones".

An invitation to tender that has been issued to the banks offers an interest rate subsidy to private lenders, who will not be allowed to charge students a higher interest rate than is offered under the current scheme, but would be able to choose which students to lend money to.

Loan providers would recieve compensation for policy write-offs under some circumstances, such as when a student dies, and would either be paid an amount equal to 25 per cent of "irrecoverable" loans due to default, or compensated for non-payment above a set "catestrophic" level.

They would get 100 per cent compensation on irrecoverable loan balances where these were more than 20 per cent of the total advanced in any one year.

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The Labour Party predicted that each private loan would require a subsidy of at least Pounds 1,500 over its lifetime, and that the Student Loans Company which operates the current scheme would be left to pick up bad debts and struggle with a higher percentage of defaults.

Meanwhile, the annual report of the Student Loans Company, published this week, showed that by March this year 11,296 students were behind with their loan instalments - a default rate of 7.7 per cent. The report admits an "unacceptable" deficiency in performance during the last academic year due to problems with a revised loans re-application system, which left the Company falling short of targets for processing loans set by the Government.