Top-up fees are looming, but students are already finding themselves in terrible financial predicaments. Michael North reports

Steve was in the final year of his degree when his life started to fall apart. First came the news that his brother had sustained a severe head injury. Steve spent his student loan travelling from his north London university to his home in Manchester to be there for his brother and family. His studies in history and politics started to suffer. Then, the same year, Steve suffered another huge blow. His parents, both in their early sixties, died suddenly.

That was 15 years ago. Steve has spent the interim years struggling to live his life. He has been clinically depressed, in and out of mental care, homeless and has fought with alcohol addiction. "The Nineties turned into a bit of a haze," he says. "Time stood still. The issues were so much bigger than I was. It was too daunting to deal with."

Now Steve is trying to restart his life. He has secured a place on a course at Goldsmiths, University of London, in social, cultural and creative processes. But there is a major hurdle to his future progress. Steve owes the Student Loans Company (SLC) ?10,000. He borrowed the money during his first degree but could not pay it back because of his illness. As a result, Steve's application to his local education authority for the ?620 annual tuition fee has been rejected. He has a credit blacklisting.

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Steve is not alone in his predicament. Gaynor, another first-year student at Goldsmiths, cannot apply to her London local education authority for the Pounds 930 annual tuition fee she needs because she has a county court judgment hanging over her due to the ?6,500 she owes to the SLC.

Gaynor, who is of African descent and grew up in south London, was forced to give up her degree at London Guildhall University in 1995 because of the onset of sickle cell disease. The nature of the disease - cells get stuck in the blood vessels causing agonising pain - led to countless hospital visits, dependence on powerful debilitating drugs and to eight years of clinical depression. Gaynor has now found the energy and motivation to restart her life. She has started her course, having been told that her six-year-old court judgment will lapse on December 13, when she can reapply to the LEA. But she says the uncertainty of her situation would have discouraged her from contemplating ÖйúAƬ when she was less robust than she is now. "A year ago, if the LEA had told me it would not fund me I would probably have walked away because it would have been too much to cope with. You only get what you want if you don't take no for an answer."

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Gaynor and Steve may have accepted a future of endless unemployment and numbing daytime television had it not been for the Open Book project at Goldsmiths and its inspirational leader, Joe Baden, an ex-convict and a former addict. He runs a weekly study skills course to instil confidence in new students who have personal difficulties. "Joe is an inspiring guy," says Gaynor. "You think, 'if he can do it, so can I'."

Baden says Steve and Gaynor's problem is not untypical. "Every year at this time, I spend hours each week trying to convince students still waiting for their overdue loan payments and literally living with no income, that they need to continue with their studies. I often look on in awe at their resilience and wonder how it is that more of them do not fall by the wayside, the victims of depression and stress-related mental illness.

"Ours is a relatively small project; even so, since the beginning of the new academic year, exclusion on the grounds of non-payment of a previous student loan is increasingly coming to my attention."

Guidelines issued by the Student Loans Company for ÖйúAƬ Student Finance in England and Wales for the 2005-06 Academic Year say that applicants for support are not eligible if they are in breach of a student loan agreement. The guidelines stress that "LEAs do not have any discretion in determining an applicant's eligibility in these circumstances".

A spokesman for the SLC doubts there are many people in the same predicament as the two Goldsmiths students because of the "safety measures"

that allow deferment of payments due to unforeseen circumstances such as illness.

But a finance spokesman for the National Union of Students says that people get "caught by the law" because there is no "retroactive deferral" - that is, if they have breached their agreement with the SLC by losing contact during illness, they cannot redraw the agreement and continue to study.

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"This is not an unusual situation. The agreements are governed by the Consumer Credit Act so these people tend not to get a great deal of sympathy," he says.

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The NUS has been pressing the Government to clarify guidelines with the SLC for drawing up settlements with loan defaulters so that they can proceed with further studies. "It's important these things are laid down; these sorts of people need clear guidelines. In almost all cases they have not been earning. Our advice at the moment is that they should try to negotiate a settlement," the NUS spokesman says.

Jemma Samuels, business development officer for UniAid, a nationwide charity that supports the most disadvantaged students, also says that the case of the Goldsmiths students is not unusual. "We have had applications from people in similar situations. It's heartbreaking." She says that illness and financial pressures account for 21 per cent of student dropouts.

Baden fears that the future fees regime and the stresses of borrowing larger sums of money will lead to more students dropping out and being reluctant to take out another loan to return, or being unable to do so.

The greater sums of money involved in future will throw up "bigger problems" when students drop out, according to Claire Callender, professor of social policy at London South Bank University and a government adviser on student finance.

"When will students be able to give up a year? Will they be able to pick up where they left off? Will they pay interest on loans in the interim? It's an issue for universities giving bursaries: do they give the full amount (for a course) or stage payments? Some will have thought about these things, others will not. It's the danger in a decentralised system... some universities will be more sympathetic to such students."

Baden believes that the funding system "discriminates" against students in the worst social situations but who have great potential - the very people universities are supposed to target as part of widening participation - and that it has a "traumatic impact" on them. He projects a bleak future: "If we continue to allow the slow commercialisation of student funding, then what next? Why not go the whole way? We could have SLC call centres in Outer Mongolia, loyalty cards, Cat (credit accumulation transfer) points for every ?1,000 borrowed and revenue-generating insurance policies against ill health while studying. The disabled, elderly and anyone else who might not be able to work post graduation would, of course, have to pay for themselves. We are already on the way to a system that, though not based on the ability to pay, is in some cases based on the ability to pay back."

For Steve and Gaynor, the importance of support from people such as Baden and the team at Goldsmiths cannot be understated. Gaynor says: "Goldsmiths is not snobbish, it's for normal people. If there were more support groups, other people would come forward."

Steve adds: "This course is a huge stepping stone in rebuilding my life and self-confidence. I don't want to be stuck at home watching TV. This time next year I'd like to be in the wide world again living a full life."

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Steve and Gaynor's names have been changed at their request.