Plans to impose penalties on students who pay off university loans early are being ditched, the government is expected to announce next week.

Ministers were considering introducing annual charges of around 5% on payments above a certain limit to prevent wealthier students avoiding interest charges on the new standard 30-year repayment plans.

The proposals were billed as "progressive" but the government is dropping them amid fears hundreds of thousands of students would end up losing out.

It has been reported the Lib Dem scheme was scrapped as part of a deal that saw Prime Minister David Cameron back down over Business Secretary Vince Cable's choice of Professor Les Ebdon to head the Office for Fair Access (Offa) despite fierce Conservative opposition.

Universities and Colleges Union general secretary Sally Hunt, said: “Government should be prioritising how to make it easier for poorer families to afford university rather than focusing on yet another policy designed to make life easier for the wealthiest in our society. Today’s move exposes once again that we really are not all in this together.

“While no one would condemn any family that sought to pay off their children's debt as fast as possible, today’s move simply exposes yet again what an inconsistent mess the higher education reforms are.”

A Downing Street source told The Telegraph: "The Lib Dems were very keen to appoint Ebdon and we felt very strongly about penalties for early repayment of loans. This is hopefully good news for tens of thousands of families, as well as many Conservative MPs who had raised concerns about the penalties."

From September students will be able to take out loans to cover their annual tuition fees bill of up to £9,000 as well as their living costs.

They will begin to repay the loans once they earn more than £21,000 a year and any outstanding balance will be written off after 30 years.

Consultation on the plans to introduce early penalty fees closed earlier this year and ministers are expected to announce the plans have been dropped next week.

A No 10 spokesman said: "The consultation has now closed and we will come forward with our response shortly."

As the director general of Offa, Prof Ebdon will be responsible for ensuring the introduction of higher tuition fees do not deter students from low-income backgrounds from going to university.

His appointment is said to have been opposed by Education Secretary Michael Gove who is reported to believe that he was more interested in social engineering than promoting excellence in universities.

That view was echoed by Conservatives on the Commons Business, Innovations and Skills Committee, which last week called on the Government to reopen the selection process following a pre-appointment hearing with Prof Ebdon.