The shake-up will also involve, for the first time, tuition fees of pounds 1,000, although students whose parents earn less than pounds 16,000 a year will be exempt.
The changes, which will be announced by ministers on Wednesday, come in response to the report by Sir Ron Dearing into higher education which was initiated under the Conservative government.
David Blunkett, the Secretary of State for Education and Employment, will agree to allow universities to levy pounds 1,000 tuition fees which will be covered by loans at subsidised rates of interest.
Until now, tuition fees for full-time students have been paid by the Government, with loans available to cover the costs of some maintenance.
Those whose families' income is less than pounds 16,000 a year will be exempt; those with an income of pounds 34,000 or more will pay the full fee; and those in between will pay on a sliding scale.
Ministers will also announce plans to allow poorer students to pay back their loans over a longer period of time. They also plan one-off hardship loans of pounds 250 to those who can show acute financial difficulty irrespective of the income of their parents.
The Government will reiterate its opposition to top up tuition fees which some individual universities want to levy.
However, poorer students will lose out through changes to the means-tested maintenance grant, worth about pounds 2,160 a year. The Government will announce that, as of 1998, the grant will be phased out in favour of a loan.
Ministers will also study ways of reforming the payback mechanism, including a change to ensure that the Inland Revenue collects the cash.
The changes have been prompted by the rapid rise in student numbers over recent years. In the late 1960s one in 20 young people went into higher education, compared with one in three now.
Ministers see the decision on how to react to Dearing as one of the toughest policy problems yet faced by the Government. One source said: "The Government is determined to be courageous and to take the right decision now. After years of hand-wringing by the Tories, the status quo is not an option."