Lancaster University sent out an alert on Twitter just after 21:00 BST.
It said the group had fallen ill after taking the drug Spice and urged people to check on their friends and call 999 if necessary.
Ambulances were called to student halls between 18:00 and 19:00, according to Lancaster University's student paper.
Vicky Tyrrell, a spokeswoman for the university, told the Guardian that police had called university authorities to tell them that the students had been taken to the Royal Lancaster Hospital.
"We've got five students who have been taken to hospital with a suspicion that they had taken the drug," she said.
"Of the five, we know that two of them are seriously ill."
It is understood the five students all knew each other.
Spice is a plant-based mix which is coated with synthetic chemicals that work on the same part of the brain as the active ingredient in cannabis.
It was among a number of legal highs outlawed in 2009 amid growing concerns they posed a threat to users' health.
According to drug advice service Frank, side effects of synthetic cannabinoids can include an elevated heart rate, sickness, and hallucinations.
Five students are in hospital, two of them in a critical condition, after taking a synthetic cannabis substitute.