The row which has broken out over the deal at Newham College of Further Education, in London's poorest borough, has revived the debate over incorporated colleges' position in the no man's land between public and private sectors.
Such loan arrangements are not uncommon in business as a way of providing senior directors with extra remuneration or attracting top staff but are much rarer where public money is involved.
The principal of Newham College has received Pounds 30,000 while four colleagues have been loaned Pounds 20,000 and Pounds 15,000. Other loans have been taken up in the last year by six more senior postholders.
The loans, which have been authorised by the college governing body, do not have to be repaid until the recipients leave the college. They are unsecured and no use is specified for the cash. There is no suggestion of any legal impropriety in the arrangement, which has been firmly defended by the college. However, it was this week condemned as a "fat-cat deal" by college union representatives.
The Further Education Funding Council has admitted it knows of no similar arrangement in a college. But it is satisfied that the deal, which emerged in Newham's newly-published 1994-95 accounts, is an appropriate use of funds, as long as the loans are repaid.
College principal Martin Tolhurst said the loans were part of the college's remuneration package for its 11 senior staff, offered as an alternative to giving staff cars. He said: "It is a standard taxable benefit which has been fully disclosed."
Newham's financial report shows a surplus of Pounds 1.85 million for the year ending last July.
The college's branch of the lecturers' union NATFHE insists the cash, or interest which it could have earned, would have been better spent on education and training in the most deprived borough in the country (according to the Department of the Environment). A spokesman said: "Who is going to count the cost in opportunities lost?" Mr Tolhurst said the NATFHE branch, which is in dispute with management over contracts, has never raised its opposition to the loans with him.