Ministers are considering an immediate rise in upfront tuition fees to help bridge the gap in university funding until more radical reforms are introduced.
Plans submitted to education secretary Charles Clarke would see above-inflation increases in the existing fee for the next five years. Graduates would then be expected to meet more of the costs of higher education, either through a repayment scheme or a full-blown graduate tax.
Two options are being prepared for announcement in next month's strategy document. The first would raise the £1,100 annual fee initially by inflation plus, perhaps, £100. The second would involve a steeper initial increase of up to £500.
Universities would be allowed to charge less than the maximum fee. Both models would allow for above-inflation rises in subsequent years.
Prime minister Tony Blair ruled out parents having to pay thousands of pounds in upfront fees in a Commons speech a fortnight ago. He signalled that fees would have to rise nonetheless. Mr Blair said that the money could come only from taxpayers, students or their parents.
Mr Clarke has the power, under the 1998 Teaching and Higher Education Act, to raise the annual fee above inflation. But such increases must be approved by the Commons and the House of Lords.
Increasing fees sooner rather than later would bring extra income to universities, which need nearly £10 billion more over the next three years. It would supplement the public money allocated to higher education from the government's spending review settlement for 2003-06, due to be announced alongside the strategy document. Much of this extra money will be earmarked for staff pay.
Any upfront fee rises would be integral to the government's move to a system where charges are differentiated by course, and possibly by institution. Annual fees would be capped but could be increased over time.
Upfront charging would be scrapped, with graduates repaying the cost of their studies according to their earnings.
There is still debate between ministers over the merits of a graduate tax versus a loan-repayment scheme. Either way, there is certain to be extra financial help for the poorest students.
The system would require legislation. This could be introduced after the next election when the Labour Party manifesto, which rules out top-up fees, has been rewritten.
January's strategy document will also urge universities to consider whether they have the right balance between teaching and research staff.
It will ask whether students and institutions might not be better served by having teaching-only staff who, if freed from research, would have the time and expertise to deliver the level of tuition that undergraduates paying higher fees would expect.
The document will encourage higher education institutions to look at new ways to deliver courses. Options such as two-year degrees for the most able students would require more intensive learning and drive the need for dedicated teaching staff.
There may not be any discounts for two-year degrees, however, as the amount of teaching needed to gain a degree should be the same, however long it takes.
But further demarcation between teaching and research would be resisted by staff who are anxious to retain their role as practising academics, and universities worried that they could become teaching-only institutions.
Vice-chancellors' group Universities UK this week warned against teaching-only institutions in its response to Mr Clarke's higher education issues papers that were published last month.
UUK said that all higher education institutions benefited by doing research alongside teaching. It warned against any attempts to strip research degree- awarding powers from weaker research universities, which could leave them as teaching-only institutions.
Government sources signalled a move away from measures to force universities to become teaching-only institutions. But they stressed that there would be incentives that would encourage institutions to play to their strengths, whether that was in teaching, research or both disciplines.