The scheme would make universities far less dependent on state finance, says Russell Group

The UK's elite universities are considering proposals that would allow them to raise potentially hundreds of millions of pounds on the financial markets by issuing bonds .

Selling the bonds – long-term debts issued by companies – would enable them to reduce their deficits and dependency on the taxpayer. A university would have to pay back, with interest, the amount it borrows – likely to be £100m or more – on a specific date in say 30 or even 50 years time.

The Russell Group of 20 leading universities including Oxford and Cambridge argues that, at present, the state does not provide sufficient funds to cover the cost of teaching undergraduates and universities are left with a shortfall. It says institutions that raised cash in this waywould be far less dependent on taxpayers' money. .

Universities would probably have to pay an interest rate of up to 6% on the money borrowed through a bond. The group suggests that the capital markets would assess the quality and reputation of a university before setting out borrowing terms. .

A group of universities would allow a large bond issue, capable of attracting "major investors", it said. The bonds could even be marketed to alumni, who might be encouraged to buy them at lower than market rates.

The Russell Group made the argument for issuing bonds in its submission to a cross-party review on university funding and tuition fees led by Lord Browne, the former BP chief executive. The review will report in the autumn.

The Russell Group submission states: "Such a proposal would raise up-front cash for universities without placing additional pressure on government finances."

Fram Dinshaw, finance bursar at St Catherine's College, Oxford University, said this would be a good idea, if the loan was "properly structured", because it would be "a way out of the dependency on state funds".

In January this year, it was revealed that Cambridge University was planning to raise up to £400m from its first bond issue. Ivy League universities in the US, such as Harvard and Princeton, have issued bonds for several years.

One downside is that bond markets are inflexible and can make it impossible to pay back the debt early.