Would a graduate tax would be fairer than fees?

Further signs that the National Union of Students has become pragmatic and responsible are contained in a report published yesterday in which it calls for a graduate tax that is related to earnings and the number of credits studied to replace the current £3,225 top-up fee.

Its proposals, which are seen as "smart" and "imaginative" by some commentators, are important because they mark a dramatic break with the NUS's recent past in which it rejected outright all tuition fees. Under its new president, Wes Streeting, the NUS is finally getting involved in the debate on university funding in advance of the Government review later this year into the top-up fee.

"What we're proposing is a system that abolishes up-front fees for all students, including part-timers," says Streeting.

"This is a significant change. It abolishes fees, full-stop. We're trying to overturn the whole landscape of the funding debate. For too long there has been a lazy assumption on the part of vice chancellors that the fees review is about how high fees can go. We are demonstrating that there are other, more radical alternatives available to fund the system equitably and sustainably."

The NUS, which employed economists to undertake the financial modelling for the report, have turned their faces against a market in fees. They are worried that, if the Government review on the top-up fee recommends raising the cap higher, more of a market will emerge, with some universities charging more than others. This is unfair, they say, because it will mean the richer institutions become richer still.

Their proposal is that students should pay towards the cost of their higher education because they earn more as a result, but some earn more than others, and therefore those individuals should pay more. Payments would also be related to the amount of higher education – the number of credits – that the graduate has completed, which would free up the system and enable people to move in and out of study much more easily. No one would pay anything until after they have graduated and are earning £15,000, as happens now.

In addition, payments would be spread over a period of 20 years to ensure that people don't have to contribute for the whole of the working lives.

Although not everyone in the university world is enthusiastic about the NUS's alternative higher education funding system – far from it – there is a widespread welcome for the students' contribution.

The beauty of the proposals is that they would actually increase the amount of money raised – after 20 years the sum raised would be £6.4bn a year, after 30 years £7.9bn each year, and after 40 years £8.5bn. That compares with £6bn a year under the current system if the top-up fee cap is set at £5,000.

But the most unpopular part for the research-intensive universities will be the proposal to set up a People's Trust for higher education into which all the money raised from graduate contributions will go. The NUS has come up with this idea to ensure that the money is not snaffled by the Treasury and spent on things other than higher education.

But what the research universities don't like is having the money raised in graduate contributions channelled into the People's Trust and doled out to all universities according to the usual Higher Education Funding Council formulae. Both the Russell Group and the 1994 Group of small and beautiful universities believe that universities should be able to keep the income they attract from students to improve what they offer.

"Any mechanism that prevents variable fees and the functioning of a regulated market would be damaging to the sector," says Alistair Jarvis, director of communications of the 1994 Group. "We strongly support a regulated market because this is the best way to drive up excellence in research and teaching, and to deliver student satisfaction. A system of variable fees has been, and remains, the correct strategy. This system should be developed, rather than fundamentally changed."

But the NUS is supported by Bahram Bekhradnia, the director of the think tank, the Higher Education Policy Institute, who describes their ideas as "imaginative", "quite smart" and "radical". Their proposals are more progressive than the present system, he thinks, but they are unlikely to see the light of day because the Treasury is so opposed to hypothecated taxes, and putting money raised from a graduate contribution into a People's Fund is effectively hypothecation.

The Million+ group welcomes the report. But Professor Nicholas Barr, the higher education finance expert at the London School of Economics, says that this is turning the clock back to central planning. "If the students' aim is to be more redistributive, there are other, better ways to do it," he says.