Ministers are said to be considering savage cuts to university teaching grants of up to two-thirds, with funding for arts and humanities degrees being removed altogether.
Under plans expected to be set out next month, universities could be given more power to levy higher fees to make up the shortfall.
A major review of student finance is believed to be considering increasing the cap on tuition fees from £3,290 to £10,000 a year, although the maximum most students are likely to pay would be £7,000.
Lord Browne, the former head of BP, will publish his recommendations in October, before the Government sets out its long-term spending commitments.
It is already feared that higher education budgets could be cut by a third, with universities forced to plug the funding gap through fee rises.
Steve Smith, president of Universities UK, which represents vice-chancellors, told The Sunday Times: “Browne’s [scheme] might work at the sector-wide level, bringing in enough income to replace the loss of Government money, but that doesn’t mean it works for every institution.
“Somewhere like, say, Oxford, might be able to charge £7,000 no problem. Others won’t be able to recoup what the state takes away. A lot of institutions will be in difficulty at that point.”
Research last week by Leicester University suggested that many students would be deterred from higher education altogether if fees for some degrees increased to £7,000 a year.
Almost one-in-seven students would refuse to take degrees in arts and humanities under a substantial fees hike, while more than one-in-10 would be deterred from studying the biological sciences.
It also suggested that students would be less likely to pay higher fees at former polytechnics.
“Fee increases up to £7,000 would produce a ‘flight to quality’, with students increasingly preferring prestigious institutions,” said the Leicester University report. “Newer universities in particular may need to respond to this threat by charging a lower fee than the maximum allowed in order to remain attractive.”
-By Graeme Paton,26 Sep 2010