The Student Loans Company has accused vice chancellors of being unaware of its repayment terms and of raising irrational fears of default.

Sir Eric Ash, acting chief executive, criticised the Committee of Vice Chancellors and Principals following its report linking higher drop-out rates to students' reluctance to take out the full loan.

The CVCP report called on the Government to change the repayment system and concluded: "If students need not fear default, they will not fear the loan."

Sir Eric said: "The repayment terms which currently apply are extraordinarily benign. My fear is that, in spite of all our efforts, this message is not adequately appreciated by all students - perhaps not even by all vice chancellors."

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He reiterated that interest is not charged on loans, which are tied to inflation, and that the five-year repayment plan starts in the April following graduation only if the graduate's annual income exceeds Pounds 15,000.

However, the company is constrained from promoting its wares by Government restrictions - a situation which has led Labour's higher education spokesman Bryan Davies to promote the company to constituents while publicly promising to scrap it.

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Mr Davies told a Natfhe conference on student hardship last week that he had advised a constituent to find out about the company rather than approach a bank, because she had not heard of student loans. He said he did not want the constituent "falling into the trap of the open market".

Mr Davies added: "There are 280 jobs there in Glasgow, which is an issue I will have to address in due course when we get rid of the Student Loans Company, which is what we intend to do."