Colorado has become the first US state to introduce vouchers to enable its students to pay to attend the university of their choice, in effect launching a free market in which institutions must compete.
Law-makers have approved the plan, which allows students to decide where the state's money should go, as it faces demands for more higher education funding.
The vouchers will not be paid directly to students, but the resources they represent will be divided between universities through the Colorado Student Loan Program after students enrol.
Colorado is historically a low-tax state with a small population and 28 publicly funded universities and colleges. Until now, the universities have received allocations totalling $700 million a year (£400 million) from the government.
Although it is estimated that at least $100 million more a year is needed, large increases in government spending are restricted by law in Colorado, forcing the state to find creative ways to share the money.
Public universities are also prevented from significantly increasing their budgets by the same restrictions. By getting the cash straight from the students they can bolster their finances while getting around the law.
From autumn 2005, each Colorado student will be allocated up to $2,400 a year to spend at one of the state's 28 publicly funded universities and some privately funded institutions.
The amount is nominally sufficient to earn a bachelor's degree, but students will have to pay the difference if their tuition fees exceed the value of the voucher. At Denver University, for example, fees are considerably higher than $2,400 a year.
Low-income students eligible for federal grants are also free to choose to go to one of three participating private universities but with a $1,200 voucher.
"Quality education isn't about institutions," said Bill Owens, the Colorado governor. "It's about the future of our students."
But Jim Martin, the Colorado University regent, criticised the inclusion of private universities as "a deal with the devil". He told the Denver Post that the scheme gave the state government an opportunity to "skip out" on adequately funding higher education while freeing colleges to raise tuition fees.
"When that happens, as it most assuredly will, those highly touted vouchers will be of little use to moderate and low-income families for whom a college education has always been the path to success," he said.
Moreover, state budget shortfalls could see the value of vouchers cut to a maximum of $1,600 per student. Whatever their amount, university officials said the vouchers would have the positive effect of encouraging students from low and moderate-income families to enrol.
"It's more of a psychological move where the students feel the money is earmarked for them and they can use it at the institution of their choice, so that they're encouraged to go on to higher education," said Michele McKinney, a spokeswoman for the Colorado University system.
Critics fear that putting colleges' futures in students' hands could force closures when a low number of enrolments obscures the important roles some institutions play in providing access for students in rural areas.