David Blunkett, the party's education spokesman, revealed that Labour would seek private funding for a pounds 2.4bn-per-year loans system for students.
For the first time, parents would not be asked to contribute to students' living costs. A Labour government would abolish grants and loans replacing them with a loan system funded mainly by the banks.
But he said that Sir Ron Dearing, whose committee to review higher education met for the first time yesterday, would be asked to decide how high the rate of repayment would be. Experts pointed out that the money to pay an attractive interest rate to banks would have to come from students or the taxpayer.
At present, the interest on student loans is pegged to inflation. Labour sources said students would not have to pay the full commercial rate.
Mr Blunkett said graduates would repay the money over a 20-year period through National Insurance contributions. They would not start paying until they were earning more than the national average wage.
Vice-chancellors, students and lecturers all welcomed the policy.
Jim Murphy, president of the National Union of Students, said: "The union is in favour of a fair system of contribution from students who have benefited from higher education if this means students will have enough money to live on and will have a fair and balanced scheme for repayment relating to their income."
A spokesman for the vice-chancellors' committee said: "Removing parents from student support is a major step forward which we have always advocated. But it doesn't grasp the real nettle which is that, sooner or later, payment of tuition fees has to shift from the taxpayer to the individual."
At present, living costs are split between grants, loans and parental contributions with loans costing about pounds 1bn. Under the proposals, all students could take out loans, including part-time learners and those in further education who are not able to do so at present. Mr Blunkett said the loans would help to alleviate student hardship.
But Eric Forth, the Higher Education minister, said there was little evidence of student hardship and no evidence that drop-out rates had increased since the introduction of loans. He added that the proposals for income- contingent repayments which would mean richer graduates paid back their loans more quickly than poorer ones had not been costed.
Labour made no commitment to extra government funding for higher education, nor did it promise to meet a Confederation of British Industry target of 40 per cent of the population reaching graduation by the year 2000. However, its policy paper did support the principle of widening access - one-third of 18-year-olds go into higher education at present.
Banks have proved reluctant to finance student loans in the past. Dr Iain Crawford, of the London School of Economics, and a member of the Conservative party think-tank on student loans said he thought pension funds were a much more likely source of funds.
"The proposals could be made to work very well. Huge savings are possible on the present system. There is no reason why the Government should need to spend more."
Mr Blunkett said the details would be worked out by Sir Ron. Yesterday's proposals will form Labour's submission to the inquiry, which has been endorsed by both main political parties.
"We are putting forward general principles on which it will work and will obviously expect to pursue it with financial institutions in due course," Mr Blunkett said.
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