Kids and their parents look around at jobs and they look at qualifications. They don't need the mantra of modernisation, chanted loud in Brighton this week, to see that our kind of society and economy increasingly rewards the highly educated. They make rational assessments of prospects, which explains why tuition fees have had no effect on young people's intentions to apply to university. Graduates and those with vocational qualifications are paid more and therefore should pay more. The elementary justice of that explains why - whatever Labour conference delegates may think - public reception of the government's plans has been so warm.

Yet it seems to have been Labour activists rather than the public to whom Labour leaders have been listening. Which is why a golden opportunity for securing the finances of educational expansion at the post-18 level for the long haul has only been half-grasped.

The dimensions of the problem are these. Universities can be squeezed to make them more efficient, and have been. Universities and colleges can do more to attract private sector money. Some have been remarkably successful, and not only Oxbridge. But significantly more places can only be paid for by extra public subvention or a larger contribution from students. What the Dearing Committee offered the Government, albeit tentatively, was a way to do something the Tories, for all their fine words, had funked: to readjust the balance of payments between individual students (for whom there is unquestionably a personal benefit measurable in higher lifetime earnings) and the body of taxpayers at large. It was a poor report, because it should have been much more sharply focused, in order to achieve more persuasive public impact.

David Blunkett's plan could and should have been much more radical in shifting the balance further towards the personal beneficiary. He is asking students to pay pounds 1,000 towards their tuition, and even that obligation will fall in full on only a fraction. The "extra" money produced - assuming taxpayer contributions continue at broadly the present rate - might in theory finance some growth in student numbers. But here now is the Prime Minister pledging further expansion: 500,000 extra places by 2002. Mr Blair's ambition is praiseworthy. It is completely at one with his vision of a competitive, achieving Britain. The trouble is, it can only be paid for by a much more ambitious recasting of the basic finances of higher education.

Even if a large proportion of these extra places are to be found in that archipelago of local colleges labelled "further education", where will the incremental finance come from? Post-18 FE students pay fees. Some, for example the unemployed who will get training as part of Labour's New Deal, will have fees reimbursed from money that is already allocated. But for the rest the only option is full-cost fees - which part-timers already pay - making any expansion self-financing. That would work only if FE students could rely on some marked increase in employers' willingness to pay for their training or, like their university contemporaries, could tap into a loans scheme.

If the places Mr Blair envisions are to be found from expanding the universities of Cambridge, Coventry or Cornwall (still barely an embryo), students would have to meet a higher proportion of their course costs. Where else would the extra come from? Let's lightly skip over the technical point that more loans mean more public expenditure in the short run. Let's face instead the tricky question of whether those three universities should even be under the same funding regime.

World-class Cambridge does in fact charge more for its college-based tuition; its system offends the Labour dogma that differential fees are unacceptable. But why shouldn't Cambridge and University College, London and similar institutions seek to preserve their qualities by demanding more from students? Does Mr Blunkett really want Old Labour egalitarian misery-sharing. Again, the way forward has to be a re-examination of the loans scheme. Cambridge and suchlike places do offer a superior education. It can be open to all only if everyone has equal access to the means to pay for it - that is to say a loan they can repay from their enhanced lifetime earnings.

Tony Blair's instinct is absolutely right. The question he has posed his ministers, especially his Chancellor, is how to pay for it. Many Labour MPs may believe that the Blunkett tuition fees scheme is a scarily "hard choice". Actually it is only a pigeon step nearer the solution. Labour leaders may have thought the debate on fees was fraught, but sooner rather than later they are going to have to return to their conference with far more dramatic changes.