Wealthy students should pay full-cost tuition fees of thousands of pounds a year at leading universities and a voucher system should pay for poorer students, Lord Owen will say in a speech tonight.
Under Lord Owen's plan, universities would be able to set the fees for courses and vary the charges between subjects, as happens now with overseas students' fees.
The £2.93bn of government money spent on teaching would go into a new bursary fund to pay for vouchers. The cash would be divided among the poorer students; the 30 per cent who do not pay tuition fees under the current system, and some who pay a contribution.
David Blunkett, the Secretary of State for Education, sparked the debate on university funding in February by saying the present system of fixed fees - which do not cover the costs of a course - should be debated after the next election. At present, all students pay tuition fees of £1,025 a year regardless of which university they attend. Leading universities are pressing for the right to set higher fees, backed by government bursaries.
Overseas students are already charged full-cost fees. Oxford, for example, charges £6,300 a year for an arts degree, £8,400 for a science degree and £15,400 for medicine.
If British students were charged the full fees, new money could be injected into the universities. Better-off students would have the option of taking out student loans.
Lord Owen's plan could face strong resistance from universities under threat of going bust when students flock to the more popular institutions. But it could also bring much-needed funds to elite universities, which are slipping down the international league table.
In a speech to the Social Market Foundation, Lord Owen, who is Liverpool University's chancellor, will say: "Now is the moment for university administrators, teachers and students to build a consensus for the radical reform of higher education." Universities are underfunded and subject to too much government control while students need to be "empowered" as customers, he will say.
Higher education is not going to squeeze more money out of the Treasury because the available cash has been promised to health, Lord Owen will say. "Something is not going to just turn up.
"We have to reform ourselves rapidly and find extra resources from outside public expenditure or we will condemn our universities to an overall decline in standards. We will also not be able to expand, let alone retain, our world class research departments and we will fail to provide the knowledge and technological contribution to economic growth, which is so vital."
Since Mr Blunkett's speech, the Russell Group of top universities is looking at how top-up fees could be introduced without deterring poorer students and the Committee of Vice-Chancellors and Principals is examining the subject.
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