Universities in England should be free to set their own tuition fees, a government-backed review has suggested.

Students would be forced to pay thousands of pounds more for their degrees, with the prospect that institutions could charge as much as £12,000 a year for some courses – compared to the current £3,290 – under proposals outlined in a long-awaited funding study.

Graduates would also pay back loans at a much higher rate of interest, equal to the Government's cost of borrowing, which could leave them facing many years of debt (see the Student MoneySaving guide).

The proposals represent the most radical shake-up of the student funding system for years.

The National Union of Students (NUS) warns that if adopted, the proposals would hand universities a "blank cheque" and lead to a market in higher education.

NUS president Aaron Porter says: "The only thing students and their families would stand to gain from higher fees would be higher debts.

"A market in course prices between universities would increasingly put pressure on students to make decisions based on cost rather than academic ability or ambition.

"Those already feeling the pinch will clearly be unwilling to take such a gamble and face being priced out of the universities that would opt to charge sky-high fees."

But the proposals are supported by Professor Steve Smith, president of the vice-chancellors' umbrella group Universities UK.

He says: "We know these are difficult decisions but, in an era of public funding cuts, we have to look fairly and squarely at who pays for the cost of higher education.

"The alternatives would mean universities having to reduce the number of student places or returning to a period of underfunding. Both of these would be hugely damaging to students, universities and the economy.

"I urge politicians not to leave us with an insurmountable funding gap and, instead, work together to find a workable solution.

"If they don't then they will starve our universities of the resources they need to teach the students of tomorrow and the chance to remain a leading player on the higher education world stage."

Unlimited fees

The review calls for universities to be left to set the fees they charge students, with the Government fully underwriting those up to £6,000 a year.

Universities charging over that will be hit with a tapered levy to cover the cost to Government of providing students with finance, and will keep progressively less of the extra funding.

For example, an institution charging £7,000 for a course will keep 94% of the fee.

The review sets out figures up to £12,000 per year. Universities charging this will still keep nearly three-quarters (73%) of the fee.

But it does not specify any cap, saying there should be "no single fixed price for higher education because all universities are different and provide different courses".

The recommendation is likely to be seen as a highly controversial option for the Government and politically explosive for the Liberal Democrats, who campaigned against tuition fees during the general election.

Their favoured option of a graduate tax, ruled out by ministers over the weekend, was dismissed by the Browne review as "unworkable".

Liberal Youth, the youth wing of the Lib Dems, said removing the cap would "cripple students with unprecedented levels of debt".

New loan scheme

The review, led by former BP boss Lord Browne, calls for the introduction of a new streamlined funding scheme.

Under the Student Funding Plan, similar to the current system, no student would pay back their loans until they were in work. But the threshold at which loans start to be repaid would be raised from £15,000 a year earnings to £21,000, with outstanding loans written off after 30 years.

It emerged at the weekend that ministers appear to have agreed to introduce variable interest rates on student loans, with higher earners charged more on the money they borrowed while at university.

Higher-earning graduates would pay back their loans at an interest rate equal to the Government's cost of borrowing rather than the present system whereby interest is based on inflation so it never rises by more than the cost of living.

In addition, the review proposes to simplify the living costs system, so every student is entitled to a flat-rate maintenance loan of £3,750 a year.

It suggests a student taking out tuition fee loans of £6,000 per year for three years and £3,750 in maintenance loans in the same period will owe £30,000 by the time they graduate.

Lord Browne says: "Under these plans, universities can start to vary what they charge but it will be up to students whether they choose the university.

"The money will follow the student, who will follow the quality. The student is no longer taken for granted, the student is in charge."

He adds that, under the proposals, the bottom 20% of earners will pay less than under the current system and only the top 40% of earners would pay back close to the full amount.

Which universities to charge more?

Asked how many institutions he expected to charge more than £6,000-£7,000 annually for tuition, Lord Browne told BBC Radio 4's Today programme: "I think few will go very high.

"Above £7,000, they have to demonstrate that they really are not damaging for access and some rigorous proposals are put in place for that. They have to satisfy students through the student charter. And they have to attract students."

The 60-page document also calls for a 10% increase in student numbers over the next three years, with "no restrictions" on how many students institutions can admit.

Shadow business secretary John Denham says he is concerned the proposals would leave many graduates "shackled by debt for the majority of their working lives, that those on middle incomes in typical graduate jobs may pay more than their fair share, and the highest earners will pay less and be free of debt much earlier".

Further reading/Key links

Student loans tool: www.studentloanscalculator.co.uk
Student Loans MoneySaving guide: Student Loans 2009/10
Student loan help: Should I Pay Off My Student Loan?
Student finance guide: Student MoneySaving