Review to float top-up 'hybrid'

The government's review of higher education looks set to recommend top-up fees repaid by graduates according to earnings.

Ministers, who are finalising next month's higher education strategic review, look certain to go for a hybrid option that meets universities'

need for a substantial injection of cash while trying to defuse the row over charging students more upfront to take higher education courses.

Consideration has been given to allowing universities to borrow cash, set against future graduate repayments, to meet immediate funding needs.

This week, prime minister Tony Blair signalled a retreat from upfront fees while indicating a move to graduate contributions. He separated students from parents as a source of income.

Mr Blair said: "It won't mean that parents are having to pay thousands in fees upfront."

The strategy document is likely to recommend raising the maximum amount universities can charge students, pegged at £1,100 this year, but keeping a cap. The cap could move upwards over time. It is likely to include significant help for the poorest students with possible fee waivers and maintenance bursaries.

It is not clear how much universities will be allowed to charge, but they are likely to have the option of charging less than the maximum that is allowed by the government.

Universities are almost certain to be allowed to keep any higher fees as additional income.

Education secretary Charles Clarke could raise the current fee under existing powers in the Teaching and Higher Education Act 1998. The difficulty faced by government is that even this would risk a revolt by Labour MPs.

Yet deferring payment for tuition until after graduation means that any additional income from higher fees would take years to trickle into university coffers.

Universities say they need money now - an extra £9.94 billion over the next three years - to expand student numbers and to maintain teaching and research quality.

The emerging hybrid solution aims to balance both needs.

Graduates would repay the cost of tuition and any maintenance loans taken out during their studies when their earnings reached a predetermined threshold.

Ministers have discussed raising interest rates on loans above inflation, and it is thought that they have looked at incorporating a redistributive element by, perhaps, charging the highest-earning graduates more.

One idea is to add higher tuition charges to student loans. This would hand universities any extra fee income immediately.

But this would mean higher graduate debt, possibly deterring poorer people who are central to reaching the government's 50 per cent participation target by 2010. It would also hit middle-income families who earn too much to benefit from fee waivers or bursaries.

Ministers have considered whether universities, not students, should borrow the money to cover tuition costs, at least until the income stream from graduates rises to meet annual tuition costs.

Borrowing commercially could prove prohibitively expensive for institutions. Borrowing facilitated by government is seen as a better proposition.

Under changes to Treasury accounting, the government has greater flexibility to treat central spending that will be repaid differently from, for example, non-returnable spending on social services.

Sources at the Department for Education and Skills, which is leading the cross-departmental review, refused to be drawn on proposals. But they said ministers had agreed a broad strategy.