The government may cut funding for student places at newer universities that decide to charge the full £3,000 top-up fee in order to save its higher education policy from collapse, it emerged this week.
Higher education minister Margaret Hodge admitted that the government would consider state intervention to "create a market" in higher education amid fears that most universities will charge the maximum £3,000 a year from 2006.
Speaking at a Downing Street seminar hosted by the Smith Institute, Ms Hodge said that while she believed many universities were "sabre rattling" by saying they would charge the full £3,000, the government would take action if necessary.
She said: "We could look at supply - the funding of student numbers that constrains the market. We do control the supplyI and there is more we could do."
The government's higher education policy, including university funding plans and increasing higher education participation by poorer students, is predicated on universities charging different amounts for different courses, with only a few top-rated research universities in the Russell Group charging the full £3,000 for most of their courses.
But the Higher Education Funding Council for England has already estimated that as many as three-quarters of universities could charge full fees for most or all their courses. Newer, less prestigious universities are worried that charging less than £3,000 may lead potential students to conclude that their courses are inferior to full-price degrees, with disastrous effects on student recruitment.
Geoffrey Copland, rector of Westminster University and chairman of the Coalition of Modern Universities, said: "It is an extraordinary comment to make. It is almost as if the minister is saying we must have a market for the sake of having one. It changes the whole nature of the debate.
"I suspect that what is behind this is that the government has said it will fund all top-up fees upfront to universities until such time as graduate repayments come in. They must have written down a figure for the likely cost of this, but if everyone charges £3,000 then they have not got the money."
Roderick Floud, vice-chancellor of London Metropolitan University and president of Universities UK, said: "As the department has made clear, the level of fees charged has to be a decision taken by each institution in discussion with the university access regulator, Offa. If the government has other plansI it is essential that it specifies these in advance."
Ms Hodge quoted findings from a new report to justify the move to higher fees in 2006 and differential course pricing.
Findings by the Centre for the Economics of Education, based at the London School of Economics, show that Russell Group universities could justify fees of more than £7,000 a year based solely on the increased earnings potential enjoyed by their graduates.
Ms Hodge said: ""We have been pulling the wool over people's eyes for too long. By asking everyone to pay the same tuition fee, regardless of the university they go to, we have been implying that the benefits of every university are the same.
She went on: "They are not. By enabling universities to charge differential fees we are lifting the wool from people's eyes, recognising difference, diversity and the premium that some universities can give you over others."
Unfortunately for Ms Hodge, the report casts doubt on the economic wisdom of the government's decision to cap top-up fees at £3,000. The CEE paper Does it Pay to Attend a Prestigious University says that the cap amounts to a subsidy, as many of the students who graduate from the country's top-rated universities come from middle-class backgrounds.
The report shows that graduates of Russell Group universities earned up to 6 per cent more on average (up to £22,000 more over a working lifetime) than their counterparts who attended less prestigious post-1992 institutions - many of these students were from poorer backgrounds. Yet the higher-earning graduates would pay the same maximum tuition fees as lower income graduates from post-1992 institutions.
The study, by Gavan Conlon and Arnaud Chevalier, concludes: "These results suggest thatI the government subsidises graduates attending more prestigious institutions more generously than others and that as such there is some justification in the claim that institutions should be allowed greater freedom in setting their tuition fees."
A spokesman for the Department for Education and Skills said: "The government had to strike a balance between universities who need more freedom and money without putting off students. We feel we have reached a good compromise."