This article is more than 6 years old

This article is more than 6 years old

Vince Cable has announced plans to scrap a proposed sale of student loans, forcing a U-turn on the government's privatisation programme and potentially opening a new rift in the coalition cabinet.

Worth an estimated £12bn, the student loans earmarked for sale formed a key part of David Cameron's planned auction of state assets, but Cable called off the sale at a meeting of Liberal Democrat activists at the weekend.

"The government was considering the sale of student loans on the basis that it would reduce government debt. Recent evidence suggests this will no longer be the case," the business secretary told the Social Liberal Forum.

"Given there is no longer any public benefit, Nick Clegg and I have agreed not to proceed with the sale."

By announcing the U-turn to fellow Lib Dems, Cable appeared to have bypassed normal cabinet procedures, which will further antagonise his Conservative coalition partners, some of whom were fiercely opposed to abandoning the sale.

This is the second privatisation to be called off within a week after ministers dropped the idea of selling the Land Registry. Cable is said to have been instrumental in vetoing that move as well.

It was unclear on Sunday night whether the rest of Cable's cabinet colleagues were even aware of the latest U-turn, which raises questions over both the government's plans to reduce the debt and the future of British universities.

In his autumn statement last December, the chancellor, George Osborne, said the loan sale would help bankroll more students going to university and control public sector net debt.

The proceeds have already been "banked" by the Office for Budget Responsibility in its forecasts and projections for public debt could well need to be revised upwards.

The reversal could also squeeze the number of university places offered to school-leavers. Sixty thousand extra places were meant to be offered to would-be students in 2015-16 as recruitment controls were to be removed from universities.

Osborne claimed that loan sale proceeds would fund the early years of this growth in student numbers, but it is unclear now how the expansion will be bankrolled, with undergraduate recruitment for 2015 to begin in less than two months.

Wendy Piatt, the head of the Russell Group, said: "If the government no longer intends to use the sale of the student loan book to fund the uncapping of student numbers in England, then we would urge them to abandon this idea.

"We would be extremely concerned if the substantial funds required to pay for additional students were taken from the already very stretched budget for research and higher education. It would be very worrying if this policy leads to less funding per student."

But Toni Pearce of the National Union of Students welcomed the announcement: "Cable needs to make this decision official immediately, and recognise that we will only achieve a sustainable HE funding system if we abandon the discredited regime of sky-high fees and debts altogether."

Soon after taking power, the coalition began looking for ways to make the maximum returns from selling student loans. One Whitehall-commissioned report from Rothschild even proposed raising interest rates on old loans, which would have increased repayments for students but made the assets more valuable to investors.

The decision to sell rests by law with Cable as the secretary of state with overall responsibility for higher education.