The shock announcement in today’s Autumn Statement by the chancellor also revealed that there will be an extra 30,000 student places next year as an interim step before abolition of the cap.
Mr Osborne said the expansion would be funded by the sale of the student loan book.
The chancellor said figures show that under the coalition’s new system, “this year we have the highest proportion of young people from disadvantaged backgrounds applying to university ever”. “But there is still a cap on aspiration,” he warned.
Mr Osborne continued: “Each year, around 60,000 young people who have worked hard at school, got the results, want to go on learning and want to take out a loan to pay for it, are prevented from doing so because of an arbitrary cap.
“That makes no sense when we have a far lower proportion of people going to university than even the United States, let alone countries like South Korea.
“Access to higher education is a basic tenet of economic success in the global race.”
He continued: “So today I can announce that next year we will provide 30,000 more student places – and the year after we will abolish the cap on student numbers altogether.
“Extra funding will be provided to science, technology, and engineering courses.
“The new loans will be financed by selling the old student loan book, allowing thousands more to achieve their potential.”
A document published by the Treasury to accompany the statement added extra detail, stating that the government “estimates that the cost of the extra implied subsidy in the medium term will be around £700 million a year”.
The document adds: “This expansion is affordable within a reducing level of public sector net borrowing as a result of the reforms to higher education finance the government has enacted. The additional outlay of loans over the forecast period will be more than financed by proceeds from the sale of the pre-reform income-contingent student loan book.”
It also confirms that the cap will be removed “at publicly-funded higher education institutions in England by 2015-16”, with alternative providers also being freed in a “similar manner” that year.
“The government will continue to closely monitor quality of provision across the sector and reserves the right to reimpose number controls on institutions that expand their student numbers at the expense of quality,” the document says.
Universities UK raised concerns about the policy. Nicola Dandridge, chief executive, said it was “good news that the government is committed to expanding student numbers”.
However, she added: “We will need to understand how this is sustainable in the long-term, given that this policy is being funded in coming years by the asset sales. We also need clearer information on future cuts to the BIS budget.”
Libby Hackett, chief executive of University Alliance, said: “The announcement of additional student places is excellent news for the students, universities and the UK.
“This shows that the government are future focussed and fully recognise the role that graduates and universities play in driving the UK economy towards a more prosperous future.
“These extra places will ensure the UK can meet the need for additional highly skilled graduates helping us meet the demands of the future economy.
“Despite the difficult climate for all young people entering the job market it is still the case that a degree is by far the best route for most individuals. Universities will work hard to help with the transition into employment for all students.”
