John Kerry, the former US Presidential runner, yesterday sought to force through emergency federal funding for student loans after Citigroup said that it was withdrawing from lending to some American universities.

The move by Citigroup to reduce its exposure to the $85 billion-a-year student loans market represents the fourth bank in a month to withdraw. Last month HSBC said it was no longer planning to offer loans to American students.

Yesterday Senator Kerry proposed legislation called the Emergency Student Loan Liquidity Market Act. It is understood that Mr Kerry is in talks to have the proposals addressed in the short term so that students can benefit from new funding arrangements in time for the new academic year, which starts in August.

Citigroup - one of the biggest student lenders in the US - blamed increased funding costs, which have risen amid the continuing disruption in the credit markets, for its decision.

The decision by Citigroup comes at a critical time for US university students who are expected this month and next to sift through their offer letters and choose which university to attend. Part of their decision is based on the cost of tuition and board at each university and the funding arrangements that they can secure.

While Citigroup said that it hoped its move to withdraw new funding would be temporary, it provides more evidence that the turmoil that hit debt markets on Wall Street last summer is spilling over into the wider economy and making credit more difficult to secure for American households.

Michael Reardon, chief executive of the Student Loans Company, a subsidiary of Citigroup, said: “These changes reflect the decisive action that is needed to manage our business through this difficult time in the overall economy. We continue to be well-positioned as an industry leader that is committed to delivering sustainable, profitable growth. Effective from May 1, SLC will suspend lending at certain schools where loans with lower balances and shorter interest-earning periods result in unsatisfactory financial returns.”

Banks have become reluctant to offer private student loans because worsening credit conditions have meant that they cannot package up the loans to sell them on. Last October, Washington introduced legislation limiting the returns that banks could extract from student loans.

All American students are entitled to a small federal loan to help to pay for tuition and boarding costs, but the sum is usually a small proportion of total costs and has to be topped up with a private bank loan or a bursary.Several members of Congress have urged the Bush Administration to stabilise the market after the National Association of Independent Colleges and Universities gave warning that student loans have become harder and costlier to obtain since the credit crisis.

Their decision came amid further evidence of turmoil in America's housing market as US builders started the fewest number of homes for 17 years.

According to the US Commerce Department, housing starts plunged by 11.9 per cent, which equates to construction campanies starting to build 947,000 new homes last month.

Ian Shepherdson, at High Frequency Economics, described the statistics as “truly calamitous”.

However, Wall Street was cheered by consumer price figures for March - a key measure of inflation. Last month prices rose 0.3 per cent, in line with expectations.

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