The scheme - coming a week after the row over the threat to child benefit for 16- to 18-year-olds in full time education - is likely to provoke an outcry from some Labour supporters, and will be seen as further evidence of the hard cutting edge being applied to Labour policies.
It follows a study of a similar scheme in Australia. Mr Blunkett will give a commitment that the loans will cover student maintenance, but not tuition fees, as called for by the vice-chancellors. The Labour education spokesman will commit the party to spending the additional funds on increasing the proportion going on to college or university from 30 per cent to 40 per cent by the turn of the century.
He will defend the "repayable grants" scheme on the ground that the present system of repaying loans over five years is more harsh. He will also deny it will hit the middle classes by pointing out that it will avoid families having to pay parental contributions, which can range from pounds 800 to pounds 2,500.
Mr Blunkett will stress that hard choices will have to be taken to increase the numbers going into higher education, but many of the controversial details will be handed to a review under Sir Ron Dearing, who advised the Government on the national curriculum. These will include the size of the loans, and the rate at which they should be repaid.
The Dearing review will also consider whether smart cards should be used for individual learning accounts, and proposals that they should be administered by a "learning bank" proposed in the Commission on Social Justice report.
Private money could be encouraged by Labour to finance the loans, and invest in capital schemes in universities.
A Labour source denied the repayable grants would amount to taxation. "If it were taxation, they would be repaying it through their working life and whether they had further education or not. This is not a student tax."
Students will be required to start repaying the loans when they start earning above a limit to be recommended by the Dearing committee.
Under existing plans, students can obtain pounds 4,000 in grants and loans in London and up to pounds 3,200 outside London for their upkeep. It is possible the Dearing committee will recommend an increase in the maintenance payments.
Labour also stressed that 47 per cent of those in higher education are mature students. A new higher education quality agency of laymen and academics will seek to ensure equality of standards across university degrees. The loans corporation, which has been criticised for its handling of student loans, will be reformed.
Another proposal for education, made yesterday by Lord Skidelsky, chairman of the Social Market Foundation, suggested that all parents of children aged between five and 16 should be given vouchers to spend in a privatised school system.
Vouchers are being piloted by the Government for under-fives' education and are being considered for post-16-year-olds. However, the former education adviser to the Government said the idea should be extended to pupils of compulsory school age and vouchers means-tested.
Lord Skidelsky said: "I would give all state schools the status of legally independent corporations, able to charge fees, just like universities. This would abolish at one stroke the legal distinction between state and private education, the class divide which is unique to this country."