The decision by the London School of Economics to charge less than £9,000 for normal undergraduate tuition fees will give a boost to the coalition's beleaguered higher education policy. Although the LSE will still charge £8,500, it ruptures the notion that top universities can only offer a quality education for £9,000. It also creates vital breathing space for the universities minister, David Willetts.

Whenever Willetts is rightly criticised for his failure to foresee that every half-decent university would rush to charge the maximum amount, Willetts can now point to a top-class university and say: "They can do it for less than £9,000, so why can't other elite universities?" He can also legitimately ask: "If the LSE is charging £8,500, why is somewhere like Bradford* charging £9,000?"

The LSE has the highest average starting salary for graduates and a reputation for being one of the best universities on the planet. Bradford, for all its merits, has neither – yet each of its students is forking out £500 more a year for his or her degrees.

It is true that the LSE has been able to charge less for two exceptional reasons. First, it does not produce expensive scientific research, concentrating instead on relatively cheap areas of study such as the humanities. Second, the university generates much of its income from overseas students, whom it charges eye-wateringly high fees.

A full-time Master's degree from the university will set you back close to £20,000 a year if you are an overseas student. At the same time, however, cuts to the university teaching budget have hit the LSE particularly hard. Reductions to the teaching grant for the humanities and the arts have left the LSE with practically no direct government funding.

Five hundred pounds a year is a very small saving. It reduces the cost of tuition fees for a three-year undergraduate from £27,000, to £25,500 – both very large figures. But while £500 is insignificant in financial terms, politically it is priceless for the coalition.

It may not be much, but it's all there is for the government to cling to as it tries to swim through the choppy waters of British university funding.

*NB: I don't mean to pick on Bradford alone. It is in a similar position to dozens of other universities in the UK which are planning to charge £9,000 a year, despite having less-than-stellar reputations.