Students face tuition fees of £7,000 a year by 2013 under plans being developed by both Labour and the Conservatives.

Both parties are studying an overhaul of the system under which top universities would be allowed to lift fees above the current legal limit of £3,225, while many former polytechnics would offer no-frills degrees for free.

The proposal was handed by John Denham, the former universities secretary, to Lord Mandelson, the business, innovation and skills secretary, who has taken over responsibility for higher education. Vice-chancellors say a £7,000 maximum fee is the “consensus” figure — the minimum to rescue university finances without being so high as to be politically unacceptable.

There is a legal obligation on the government to consider the future of the current fee system, which was introduced in 2006, after its first three years of operation. Mandelson is due to launch the review this autumn. It is thought highly unlikely it will be finished before the next election, which must be held by next June.

Both Labour and the Conservatives are anxious to avoid fees becoming an issue with voters. Labour blamed its loss of marginal seats in university towns at the 2005 election on its recent legislation for the previous increase in fees.

One vice-chancellor said: “A simple rise in the cap to £7,000 could be put through soon after this election and it would have the advantage of letting the government cut the amount it puts into universities.”

It has emerged, however, that Mandelson is also studying options that go far beyond simply deciding whether fees can be increased. Denham’s idea calls for a wholesale restructuring of higher education. Some post-1992 universities and further education colleges could offer free, government-funded “walk to study” degrees, often in vocational subjects, to local students living at home.

Elite research institutions, meanwhile, would be allowed to charge far higher fees than at present, with students paying for future earning power.

Denham did not put a figure on fees in his scenario, but experts who worked closely with him said it could eventually mean a ceiling of £15,000, including a £2,000 “levy” to fund bursaries for poorer students.

David Willetts, the shadow universities secretary, has also studied Denham’s plan. He said the Conservatives would not decide their policy in advance of the review, and cautioned: “Just putting up fees has a series of problems. Charging more at the bottom of the recession will be tough, and universities would have to show any extra fees were going to help the quality of education — a challenge to which I don’t think they have yet risen.”

Supporters of an increase believe university funding has become an emergency. Cuts of 5%-20% in government funding for higher education are expected whoever wins the next election, despite increasing numbers of students.

Seven universities, including London Metropolitan and Thames Valley, are on a secret official list of institutions at risk of financial failure, a total expected to reach as high as 30 next year.

Paul Wellings, vice-chancellor of Lancaster and incoming chairman of the 1994 Group of research institutions, warned of a “valley of death” over the next few years until fees could be raised, with universities forced into severe cutbacks.

Another source said political considerations were bound to hamper the funding review. “Mandelson is nowhere near knowing how he wants to fund universities,” he said. “This is not a government that believes it will actually be making decisions, but it is thinking about how to box the Tories in.”

He added: “A few months ago I would have thought it inconceivable for any change to come in before 2013. Now I see the possibility of George Osborne [the shadow chancellor] putting it into a ‘days of misery’ package after the election. It would technically be possible to bring in change for 2011.”

A condition of freeing universities to charge higher fees is likely to be that better-off students are charged a levy on fees to subsidise bursaries for those on lower incomes. Further cross-subsidy could be provided by money from overseas students and alumni.

Luke Johnson, the Channel 4 chairman and entrepreneur who is a member of Oxford’s fundraising committee, said: “It is inevitable there will be higher fees and more independence, but it has to go hand in hand with much more for bursaries. There is a disproportionate number of private school undergraduates at Oxford and it is by no means ideal.”

Alan Ryan, retiring warden of New College, Oxford, said his college was drawing up bursary plans to ensure no family on an income of less than £35,000 would be worse off if fees were raised from their current level.

Birmingham University, meanwhile, is one of those planning in the long term to offer “needs-blind” admission, in which bursaries for poor students are provided mainly from a levy on better-off students.

Last week Alan Milburn, the former cabinet minister, wrote in a report commissioned by Gordon Brown that such an arrangement could promote social mobility by drawing more people from poorer families into university.

Tomorrow, in a speech to Universities UK, an association of vice-chancellors, Mandelson is expected to take up Milburn’s theme and warn that institutions need to step up efforts to bring in more students from poor backgrounds through their admission and bursary policies.

Some universities are already making preparations for an increase. Exeter is understood to be one of several preparing an aggressive strategy of charging fees of at least £7,000. It will also offer generous bursaries in addition to non-means-tested awards — including sports and academic scholarships — to lure the best students regardless of income.

The result will be far higher debts for those whose studies are not covered by bursaries. Recent research by Universities UK has found that raising fees to £7,000 would bring average debts of £32,400, compared with the current £20,000.

Additional reporting:

Miranda Prynne

Paying more

The middle classes can expect to pay more for their degrees. Options include:

Raise fee cap and axe taxpayer subsidy for interest on student loans, charging same rate as government bonds instead — an increase from 2% to 3.8% on current figures. This will be submitted to Lord Mandelson’s review by Nicholas Barr of the LSE, intellectual father of tuition fees. He calls the subsidy a “perk for mid-career professionals”.

Gradually move to far higher fees, traded for cuts in government funding and a bursary system. This has been suggested by heads of Oxford and Imperial.

Scrap tuition fees and replace them with a tax on graduates so poorer families are not put off applying. This is under consideration by some senior Liberal Democrats and backed by the National Union of Students, who suggest a rate of 0.3%-2.5%.

“Big bang” move to US-style system of colleges free to set fees, with many new ones opening, some of them profit-making. Quality would be more strictly regulated and “credit transfer” would let unhappy students switch institution mid-course. This is backed by Sir Cyril Taylor, guru of Labour’s city academies.

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