Cable in student loan shake-up

Business Secretary Vince Cable has paved the way for new student funding arrangements under which the highest-earning graduates would contribute most to university funding.

The Liberal Democrat Cabinet minister ruled out a graduate tax, despite previously promoting the idea, on the grounds that it would not be fair or help reduce the deficit.

But he said the Government would shortly be able to announce a new system featuring a "progressive system of graduate contributions".

Interest rates would be varied so that those who get the most financial benefit contribute the most towards their education. Lower-earners would pay correspondingly less. It appears likely also that the cap on tuition fees, currently £3,290, will be lifted, possibly to £7,000 or even £10,000.

Mr Cable's renunciation of a graduate tax will dismay many Lib Dems - during the general election, the Lib Dems promised to scrap tuition fees altogether.

Leader Nick Clegg, now the Deputy Prime Minister, warned in April that it would be "a disaster" if fees were increased to £7,000. Only last month, the party's annual conference affirmed the Lib Dems' commitment to replacing tuition fees and student loans with a graduate tax.

But, in a letter to all Lib Dem and Conservative MPs, Mr Cable said a pure graduate tax was "not the way forward". "While it is superficially attractive, an additional tax on graduates fails both the tests of fairness and deficit reduction," he said.

Mr Cable said some graduates, because the tax would be open-ended, would find themselves paying "many times the cost of their course". At the same time, foreign students would pay less than British graduates because taxes could not be collected from people living abroad.

A Labour Party spokeswoman said: "At a time when many families are hugely worried about levels of personal debt, we don't think that tuition fees or £7,000 or £10,000 are the right way to provide secure, stable long-term funding for our universities."

The Department for Business, Innovation and Skills - which is responsible for higher education - refused to comment before the publication of a review of student finance next week.