Business Secretary Vince Cable was today on a collision course with his party after ruling out a new graduate tax to replace university tuition fees.
Having previously promoted the idea of a graduate tax, the Liberal Democrat minister has accepted Tory criticisms of the scheme and admits it is not the answer.
He said the coalition Government would shortly be able to announce a new system featuring a "progressive system of graduate contributions".
That is expected to mean introducing variable interest rates on student loans so that higher-earning graduates pay more towards the cost of borrowing their way through university.
An increase in the cap on tuition fees, possibly to as high a threshold as £10,000, now also seems likely.
Such a move would be deeply unpopular with the Lib Dems, who campaigned during the general election to scrap tuition fees altogether.
Lib Dem leader Nick Clegg, now Deputy Prime Minister, said in April that increasing tuition fees would be a "disaster".
The Lib Dems reaffirmed their commitment to replacing tuition fees and loans with a graduate tax at their party conference only last month.
The Department for Business, Innovation and Skills - which is responsible for higher education - refused to comment on the Government's plans before the publication of a review of student finance next week.
But Mr Cable renounced the idea of a graduate tax in a letter to Lib Dem and Tory MPs last night, saying it was "not the way forward".
"While it is superficially attractive, an additional tax on graduates fails both the tests of fairness and deficit reduction," he said.
His comments reflected the objections that many Conservatives have been making known for several months.
Mr Cable said some graduates, because the tax would be open-ended, would find themselves paying "many times the cost of their course".
At the same time, foreign students would pay less than British graduates because taxes could not be collected from people living abroad.
Additionally, he said, a graduate tax would effectively increase the deficit over the next five years by many billions, meaning even deeper cuts elsewhere.
But he admitted that a graduate tax had the attraction of "in-built progressivity in repayments", indicating he wanted to keep that element in any alternative system.
"As I have said on previous occasions, I am entirely committed to a progressive system of graduate contributions, the details of which we will be able to confirm shortly," he said.
"And I have been open-minded about the possibility of a pure graduate tax. But it is clearly not the right vehicle. We can do better - and we will."
His letter came amid heightened speculation about the Government's plans ahead of Lord Browne of Madingley's report into university funding and student finance on Tuesday.
A poll showed that the graduate tax proposal had the backing of a majority of voters.
An ICM survey for The Sunday Telegraph found that 61% supported a graduate tax, compared with 29% who would rather see higher tuition fees.
But the Business Secretary said ministers wanted a system that not only maintained financial support for higher education but assisted with the deficit.
"If we are to avoid substantial cuts in higher education more money must be found," he said.
"Next week, Lord Browne will publish his report, with recommendations for reform. The Government will respond shortly.
"But I can say now that I want a system that meets all of our key objectives for HE, and that helps with our deficit reduction programme."
The former Labour government rejected the option of moving to a graduate tax system.
But Ed Miliband, the new Labour leader, has indicated his support for the idea of a graduate tax to replace tuition fees.
A Labour Party spokeswoman said: "At a time when many families are hugely worried about levels of personal debt, we don't think that tuition fees or £7,000 or £10,000 are the right way to provide secure, stable long-term funding for our universities."Reuse content