The Business Secretary, Vince Cable, will announce plans for a new graduate tax to replace tuition fees in a speech later today. In a bid to cut costs at universities, he will also suggest introducing two-year degrees in some courses and encouraging more students to live at home.
A graduate tax would mean students repaying the costs of their education through taxation once they begin working, with higher earners paying more. Speaking at London's South Bank University, Cable will call for a "radical re-think" of how universities in England are funded and say the government wants to work with the sector "to turn the current funding crisis into an opportunity".
Cable will say that the government should look at the "feasibility of changing the system of financing tuition so the repayment mechanism is tied to earnings - so that maybe lower earners pay not more - maybe less - and higher earners pay more".
The University and College Union, which represents lecturers, warned the government that a graduate tax had to be more than just a "rebranding exercise".
The UCU general secretary, Sally Hunt, said: "If the government thinks it can get the public to swallow higher fees as some sort of graduate tax it is living in a dream world. We need a proper debate on how to fund our universities, not an exercise in rebranding.
"We will judge the plans on what they actually do and whether or not students will be forced to pay more, not how the government markets them."
But the shadow education secretary, Ed Balls, praised the coalition's decision to support a graduate tax.
He said: "As the first Labour leadership candidate to call for a graduate tax, I'm pleased that Vince Cable has followed many of my fellow contenders in backing this idea. When I was a Treasury adviser I argued for a graduate tax, because it was a fairer system which meant no upfront costs and no assumed debt for students and their families. It means graduates pay a contribution to the cost of their university education, but only once they are in work and clearly based on their ability to pay."
All of the Labour leadership candidates, with the exception of David Miliband, have come out in favour of a graduate tax.
In the past, the Liberal Democrats have campaigned for free university education and pledged to phase tuition fees out at the election. The coalition agreement allows them to abstain on votes on the issue.