Ministers had been considering a 5 per cent fine on excess payments to stop wealthier students escaping interest rate charges over their 30-year repayment period.
The cancelling of the plans is widely seen as a concession to Tory backbenchers infuriated by the decision of business secretary Vince Cable to appoint Les Ebdon, vice-chancellor of University of Bedfordshire, as the new director of the Office for Fair Access.
Mr Cable had championed the early redemption charges because he feared poorer students would end up paying more than those middle-class students able to pay off fees early – with the latter avoiding interest repayments of around ?12,000 over their lifetime.
The deal is believed to have been brokered by David Willetts, universities and science minister, who was blamed for backing Professor Ebdon’s nomination by Tory MPs.
A Downing Street spokesman confirmed reports that the repayment penalties plan was now dead in the water. “The consultation has now closed and we will come forward with our response shortly,” he said.
But there is still anger at the appointment of Professor Ebdon, which will be confirmed next week.
“The scrapping of repayment penalties is very welcome but it’s still not a great political deal as Ebdon has the potential to do real damage to our country's education system,” a Conservative source told the Daily Telegraph.
Brian Binley, a member of the select committee that blocked Professor Ebdon’s appointment, told the Daily Mail: “I am pleased that we have won this minor battle, but if this is a trade-off for the furore caused by the decision of Vince Cable to appoint Les Ebdon in spite of the concerns of members of the Conservative Party, it’s a pretty feeble gesture.”