The government is facing a "very important policy choice" over whether to separate agreements on teaching and research funding for English universities that could lead to a fragmentation of the sector and the partial privatisation of some institutions.

As academics await ministers' final proposals for next year's ÖйúAƬ bill, it has been suggested that the government could opt to split the funding "contracts" with universities for their two main areas of activity.

Currently, universities receiving public money enter into one binding agreement - the financial memorandum - with the ÖйúAƬ Funding Council for England regardless of whether they receive mainly teaching or research cash.

The government's ÖйúAƬ White Paper made clear that the shift from grants to tuition fees backed by student loans meant that there would be different agreements in the future depending on what types of teaching funding each institution accessed. But questions are now being raised about how research funding would fit in and whether it would also be subject to a separate agreement.

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Such a move could allow some universities to opt out of the student loans system to avoid regulation on teaching while still receiving quality-related funding for research.

Mike Shattock, visiting professor of ÖйúAƬ management at the Institute of Education, University of London, said senior figures at research-intensive institutions such as the University of Oxford had already given "serious" thought to whether they could opt out of public teaching funding altogether.

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"[Some institutions] have thought quite seriously about that, and once ?9,000 fees bed in I wouldn't be surprised if some universities decide to go that way," he said.

A matter for ministers

Steve Egan, Hefce's deputy chief executive, accepted during a recent conference on private provision that such an eventuality was not out of the question, but added that the government would have the final say on whether to allow it.

"The key issue is, can you take research funding and not teaching funding with all the obligations that go around that?

"I know people are raising that point. It is a very important policy choice and not one that Hefce would make," he told the Private Provision in UK HE conference in London on 8 December.

The conference also heard from a senior official at the Quality Assurance Agency who suggested that there could be "quite a queue" of non-teaching organisations applying for degree-awarding powers if government reforms allow Pearson, the publishing giant that owns the exam board Edexcel, to become eligible.

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Stephen Jackson, director of reviews at the QAA, said the body had picked up "indications" that others were keen to follow Pearson's lead in "blazing a trail" for holding degree-awarding powers even when they do not teach students.

"If they are successful, there will be quite a queue forming up behind them," he said.

He added that Pearson's plan had raised a "whole host of issues" about assuring quality when the organisation's degrees would be delivered by a "multitude" of partner institutions.

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Meanwhile, the increasingly blurred line between public and private provision has also been highlighted by new figures showing a 50 per cent rise in taxpayer-backed loans borrowed by students at independent providers in the past year.

According to statistics released following a parliamentary question, ?33 million in fee and maintenance loans was lent to students on private courses "designated" for taxpayer-backed support in 2010-11, up from about ?22 million the year before.

Just under ?10 million of last year's total was borrowed by students at the Greenwich School of Management and the Brighton Institute of Modern Music - both of which receive backing from the private equity firm Sovereign Capital, which is currently thought to be involved in a joint bid to buy The College of Law.

David Willetts, the universities and science minister, also revealed in a separate parliamentary answer that a total of 5,900 students at "alternative providers" received loans last year, up from 4,200 the year before.

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Unlike publicly funded universities, the number of undergraduates drawing on government support at independent institutions is not capped, a loophole that will remain next year even though students at such colleges will be able to borrow up to ?6,000 in fee loans.

simon.baker@tsleducation.com