An Oxford college is being sued for discriminating against poorer students applying to study for postgraduate courses. St Hugh's, which was founded in 1886, is being taken to court for choosing applicants not just on academic merit, but also on their ability to prove they can pay tens of thousands of pounds for tuition fees and living expenses.

It is claimed that, along with other Oxford colleges, St Hugh's is "selecting by wealth" in asking students with a conditional place at the university to demonstrate that they hold funds to cover tuition fees, plus at least £12,900 a year for living costs. The university refuses to take into account projected earnings from students who plan to carry out paid work during their course and has only one means-tested scholarship available.

Legal papers submitted by Damien Shannon, 26, who was barred from taking up a place that he won to study economic history because he did not have access to a total of over £21,000 for fees and living costs, said: "It is my contention that the effect of the financial conditions of entry is to select students on the basis of wealth, and to exclude those not in possession of it. In particular, the requirement for evidence of funds for living costs has a discriminatory effect."

Shannon's claim, which will have its first hearing in February, states it is clear that those without access to capital and savings were being "disproportionately discriminated against" in a breach of their human rights.

St Hugh's, which has filed a defence and refutes the claim, does not deny barring Shannon due to his financial circumstances. However, it will argue that the test of a student's financial health is to ensure that they will be able to complete their courses without suffering financial difficulty and anxiety, according to its lawyers' defence papers.

It claims that the inability to meet the so-called financial guarantee, which was formalised across the university in 2010, does not fall "disproportionately within" the lower socioeconomic groups.

It adds that because the "great majority of courses at the university (including the course to which the claimant applied) are heavily oversubscribed, it is important that those who obtain a place on those courses are financially able to complete them".

St Hugh's, whose alumni include the home secretary, Theresa May, has hired Peter Oldham QC to argue its case in Manchester county court. Counsel's fees at the trial are estimated to reach £25,000 over just two days, with total fees coming to around £60,000, according to documents seen by the Observer.

Friends of Shannon say that should he lose the case and have to pay full costs, it would probably force him to declare himself bankrupt. Hazel Blears, a former Labour cabinet minister who is now chairwoman of the all-party parliamentary group on social mobility, is backing Shannon, who lives in her Salford, Greater Manchester constituency. She said that the case illustrated the scale of the financial hurdles facing students who want to pursue postgraduate study.

Almost 16,000 fewer British students started postgraduate courses at UK universities in 2011-12 compared with the previous academic year – an 8% drop, according to data released by the Higher Education Statistics Agency.

This month leaders at 11 universities told the Observer of their concerns about the socially divisive impact of rising tuition fees in response to teaching grant cuts and a lack of finance for prospective postgraduate students.

Blears, who has written to the deputy prime minister, Nick Clegg, education secretary Michael Gove and universities minister David Willetts about Shannon's case, has won a parliamentary debate on the issue to be held on Wednesday. She told the Observer: "Oxford university's demands for a guarantee on living costs are deeply unfair. They will price gifted students out of doing these courses and our country will lose out on some really talented individuals.

"It is ludicrous that a student deemed to be of sufficient academic merit is deemed incapable of budgeting to ensure they have enough money to live on. Even in an expensive city like Oxford, a student can live on far less than £13,000 a year with careful budgeting. In any case, living costs should be a student's personal responsibility and many get part-time jobs to help make ends meet."

Shannon was awarded a place to read for an MSc in economic and social history at Oxford last March by the university, but was told it was conditional on meeting the college's academic and financial requirements.

He reached the college's academic target after attaining a 2:1 degree from the Open University, but was also asked to prove to the college's satisfaction that he had "resources totalling £21,082" before he could commence study.

He successfully applied to the Co-operative Bank for a professional career development loan of £10,000 which would cover costs of "both the college and university fees, and a modest contribution to living expenses".

However the legal claim by Shannon, who says he is estranged from his mother, who is a bankrupt, and does not know the identity of his father, so is unable to rely on parental help, says: "That still left the financial guarantee unsatisfied, since I was not in possession of the necessary evidence to meet the living costs stipulated by the college."

The claim adds: "For me, the effect of the financial guarantee for living costs is to render the right of access to education at the university illusory, and thus to deny the very essence of that right".

A spokesman for St Hugh's said: "The requirement that postgraduate students provide a financial guarantee in order to take up their course place at the University of Oxford is made clear to potential applicants. The university and college have both made fundraising for postgraduate scholarships a key priority."

A university spokesman said: "Oxford has been vocal about its wish that postgraduate admissions should be truly needs-blind, and works very hard to make progress towards this aim, both by fundraising for postgraduate support and lobbying the UK government to put in place measures to ensure that postgraduates, like undergraduates, have access to loans that ensure postgraduate study is a possibility for all."