Higher fees must not be used to replace public funding, vice-chancellors have warned.
When top-up fees were introduced, ministers promised that the income they brought in would be additional, the Independent Review of Higher Education Funding and Student Finance has heard.
Steve Smith, president of Universities UK, told the review panel led by Lord Browne of Madingley that the Government must not break that promise.
The pledge - and a commitment to maintain the level of funding per student - was a central part of the "deal" on which Parliament voted in 2004, Professor Smith said at the first of two public hearings held last week.
But since December 2009, universities have seen a reduction in the unit of teaching funding and are facing a £600 million cut to their baseline funding, with the prospect of further retrenchment after the general election.
"We would be very concerned indeed if whatever scheme was introduced as a result of your review was simply used to replace public funding," Professor Smith told the panel in Manchester on 28 January.
Reducing universities' budgets was short-sighted, he stressed.
"In a very tough public spending environment, it is easy to cut universities - there are not going to be people on the streets protesting."
But he argued that such a move would be "unbelievably damaging" to the economy and to social mobility in the long run.
Universities would be able to make the savings that had already been demanded of them, but there must be no more cuts, Professor Smith said.
"Universities are efficient: they work on very narrow financial surpluses. We think those kinds of cuts can be absorbed," he said.
"But if you start cutting further ... quality will suffer and, frankly, that is not just an issue for higher education, it is an issue for the future of the country."
Existing cuts meant universities already had "extremely difficult" decisions to make, Professor Smith added.
"On a sector making (a surplus of) 2.2 per cent, the kind of cutbacks in expenditure talked about will cause us to do things such as closing programmes, closing courses, merging institutions ... that, frankly, will not be palatable politically.
"But I think it is the only way the sector can respond given the narrowness of the margins it works on," he said.
To the Victors, the Spoils? Popular universities may expand
Universities may be competing for student numbers within a few years, the head of the funding council has said, despite fears that this could result in some institutions going under.
Appearing before the review panel on 29 January, Sir Alan Langlands was questioned by David Eastwood, his predecessor as chief executive of the Higher Education Funding Council for England.
Professor Eastwood pointed out that the number of students each institution can accept is controlled centrally, preventing popular universities from expanding.
He asked whether institutions may be allowed to compete for students in the future.
Sir Alan said this "might be an inevitable consequence of where we're going".
The higher education framework, published last year, indicates that a greater degree of "contestability" may be introduced to university funding, and the drive towards a more market-based sector could also lead to greater competition, he said.
Competition for numbers would create greater volatility in the system and "give Hefce sleepless nights", Sir Alan added.
Steve Smith, president of Universities UK, told the inquiry on 28 January that "certain institutions and groups" would find competition for student numbers within a set limit for the whole sector "very appealing".
But he warned: "Some institutions would fold ... I know of one institution that has 12 applications per place, and another that has two. If you allow the institution with 12 to expand, the consequence is obvious."
Another option would be to remove the cap on student numbers altogether, he said, but he would support that idea only if the unit of funding were maintained.
"I think that would add to the list of problems you are dealing with ... the costs would be enormous," he said.
Sir Alan was also asked whether struggling universities should be allowed to fail. He replied that Hefce's prime concern was to protect the interests of students and overall levels of provision.
"We have shown that we can hold people to account, though it may be an arduous process. Our strategy has always been to help institutions to find a sustainable future."
Encourage collaboration and mergers, says former education chief
Universities have been accused of being "too conservative" by the former Education Secretary Charles Clarke.
The Labour MP for Norwich South said that when he was Education Secretary he seriously considered forcing university mergers.
He decided against it, believing that mergers and collaborations would happen "organically", but was disappointed that this had proved not to be the case.
"That hasn't happened and I think there is a real question about how you encourage collaboration between universities," he told Lord Browne's review on 28 January.
In London, he said, there are about 40 institutions, and competitors next door to one another compete for the same research contracts.
"Is this rational, is it the right way to operate? I think there is a great conservatism in universities, which is preserving some very good things, but is also conserving ways of operating that are not as radical as they need to be."
Mr Clarke said he wanted universities to look much more carefully at their missions.
All universities have a different balance between research, teaching and knowledge transfer, but it was not "obvious that all universities should do all of them".
"I think there are a number of positions that are maintained for reasons of maintaining face rather than actual benefit," he said.
"I can imagine that raising the fee cap might lead to some of this increased diversification. But that has to come from universities themselves ... and I haven't seen any evidence of it."
Mr Clarke was also critical of the expansion of the student grant system announced in 2007. "I think it was a political statement that was about the new Prime Minister (Gordon Brown) saying he was different from the outgoing Prime Minister (Tony Blair)," he said.
The fact that the changes later had to be reversed because the Government had miscalculated the costs involved was "damaging" and meant that there was a generation of students "who are treated differently from everybody around them", Mr Clarke said.
Keep it 'real': Critics raise prospect of student loan rate changes
Interest rate subsidies on student loans should be scrapped, Lord Browne's review has been told.
Charles Clarke, Education Secretary at the time of the top-up fee reforms, said on 28 January that in 2004 when the legislation went through, the Treasury had failed to engage in the discussion about the rate of interest on student loans, despite his belief that a "real" rate of interest - equal to the cost of borrowing - would have been more rational.
The decision to opt for the lower rate resulted in a system that now costs the Government about £1.2 billion a year.
At a second hearing, on 29 January, Nick Barr, professor of public economics at the London School of Economics, said that if a real rate of interest were adopted, it would not mean that graduates would have to repay a larger sum every month. Rather, they would make repayments over a longer period.
Professor Barr also criticised the Government for failing to make the case that student loans were different from credit card debt.
"When it had a good story to tell, it totally failed to get the message across," he said.
He went on to dispute the suggestion that people from poorer backgrounds were particularly debt-averse and would be disproportionately affected by higher fees.
Meanwhile, in written evidence to the inquiry, the Institute for Fiscal Studies claims that a £1,000 increase in tuition fees would reduce participation by 4.4 percentage points.
This would outweigh the positive impact of a comparable increase in loans, although higher loans and grants could make up the deficit.
"Increasing fees without increasing loans and/or grants by the same value or more will result in a negative impact on participation," the IFS submission concludes.