A private college in north London is offering government-funded places to people who "blatantly" don't have the skills, recruiting candidates off the street and from countries in eastern Europe – and in at least one case lecturing to a class with no students.

So serious are the problems that the London School of Science and Technology (LSST) in Wembley has been called the "cashpoint college" or "the ATM" by students who believe they can obtain loans and grants of up to £11,000 a year and then not show up to learn.

The higher education institution has taken £6.5m in public money in the last three years, and has tripled in size since ministers relaxed controls over student loans in 2012. Even if these full-time students take out the loans and do no work, LSST benefits from the increased numbers paying £6,000 a year in tuition fees.

The chaotic organisation of LSST demonstrates serious flaws in the planned expansion of privately run higher education colleges that was unveiled by David Willetts, the higher education minister, in 2011. Little-known private colleges were allowed to recruit unlimited amounts of students so they could compete with established universities.

A Guardian investigation into the college, which is the fourth biggest beneficary of the Willetts reforms, includes undercover footage of a lecturer having started a class without a single student present, and whistleblowers who say attendance rates have been below 40%.

During filming at the college one student said: "If you want to take the [student loan] money and not come in, they [the college] are getting paid, so they don't give a fuck."

LSST, which is owned by the west London-based Zaidi family, has about 1,500 students, of which it is understood some 700 come from Romania and Bulgaria. An estimated 300 of the students from those two countries are understood to have already had their loans withdrawn by the government. One former senior staff member who left the college disillusioned with its practices said a Romanian student had explained to him what she did. "She said … 'I get on a plane, I come to London … I stay for a week or two, and then I go back home and I get my student loan, maintenance, and I make more money than I would [in Romania]'."

An investigation into the wider private college sector by the Department of Business, Innovation and Skills (BIS) is understood to have found that about 3,000 Romanian and Bulgarian students have been claiming loans without proper proof of residence in the UK.

Willetts said the findings uncovered by the Guardian investigation demonstrated "unacceptable behaviour" and said the abuse of public funds would be stopped. Private HE colleges will have their existing courses assessed against "much tougher conditions" during the year, Willets said, and the department would recover any money wrongly claimed.

Fearing the sector was growing out of control and creating a black hole in their budget, BIS stepped in to halt student recruitment last November, ordering 23 of the fastest-growing colleges, including LSST, to stop the recruitment of funded students until September 2014.

Students and both former and current lecturers claimed LSST was admitting students with only basic language, writing or computing skills despite being enrolled on more practically based undergraduate level (HND) courses such as business, media, hospitality, music production, and tourism.

"The business model here is to make money," one student doing a computer programming course alleged. "I'm doing computers … I never had any qualifications but I know about computers. You've got other people who don't know what a mouse or a cursor is, or don't know how to use [Microsoft] Office.

"What that does is people drop out and they have a high turnover of students at this place. Every term they bring new students."

A former LSST vice-principal alleged that the enrolment push was so strong that outside agents – working outside locations such as job centres – were used in recruitment and that the college's own admissions staff helped students pass the basic entry requirements. He said it was "blatantly obvious" many prospective foreign and UK students had not filled out their own admissions forms as they often did not have the literacy skills to do so.

The former vice-principal added that many classes would remain empty and attendance rates for what should be full time students were rarely above 40%.Posing as a student, the Guardian saw one business studies class where the lecturer confirmed that none of his students had shown up 35 minutes after the session had started.

LSST said this was because it was 'submission week' and students could submit online. However, others claim this is the normal pattern of attendance.

LSST's chief executive officer, Syed Zaidi, declined to be interviewed by the Guardian but responded in writing. The college issued a statement, in which it denied the allegations, saying their admissions procedures were "undoubtedly robust".

LSST also explained they were trying to aid a challenging group of people and that many of their students "were juggling social, domestic and professional commitments alongside their studies" and so attendance could be low.

The college said it had "robust procedures for recording and monitoring student attendance" and the college employed a full-time attendance officer.

Staff at LSST fear a huge amount of student finance is being wasted on pupils who will not complete their two-year diplomas. They allege internal college data showed that only 30-40% of students submitted coursework.

"There were some students that really worked hard, that came out with all distinctions … I'm not saying there weren't successes, but if you look at the vast majority of results, they were mostly non-submissions," the ex-vice-principal said.

Capitalising on the growth of the sector, LSST recently set up two new campuses in Hounslow and Luton to teach hundreds more pupils in receipt of student finance. In a sign of growing chaos in the new market for education, Bis has made it clear to LSST that they had not sought prior designation and have halted government loans going to students being taught at those campuses. This has left genuine students in the lurch.

In 2012, as the reforms were getting under way, Willetts compared the growing private colleges to the early days of the respected University College London. "UCL was denounced when it was set up as a 'mere lecture-bazaar' and now it is one of the world's great universities," Willetts said.

"Now we are once more opening up our system to a wider range of providers that can take on students with public loan support."

LSST pointed out that it had been the subject of two successful QAA inspections and that the exam board Edexcel had also passed them very successfully.

The college said: "LSST has a mission to be an inclusive higher education institution, meeting or exceeding the aspirations of local and international students, as well as responding to the social and economic demands of the region.

"We acknowledge that pursuing this mission will bring with it certain challenges. Some of these challenges are not easy to overcome but they should be seen as a direct result of pursuing challenging missions."

The shadow higher education minister, Liam Byrne, said: "This government's free-market free-for-all in higher education now costs Britain nearly a billion pounds a year … this shocking story shows that all too often, it's money for nothing."

However, Willetts, who has compared the reforms to Michael Gove's free schools, said that while action to toughen-up controls on private colleges was currently under way, the emerging private college sector remained significant.

"These colleges have an important role to play in providing students with an alternative to university. But students and the taxpayers who provide funding deserve to get a quality service, " he said.