Graduates could pay back their loans earlier and at a higher interest rate, the UK's top universities have suggested.
Higher education is facing a deficit that could top £1.1 billion by 2012/13, and action must be taken to pump more investment into the system, according to the Russell Group, which represents the UK's 20 leading universities.
In their submission to Lord Browne's independent review of the student funding system, the group warns the financial sustainability of its universities is "severely at risk". "More investment will be needed if research-intensive universities are to maintain and build on recent improvements and continue to provide an internationally excellent learning environment."
The submission says the UK's student funding system is "one of the most generous in the world, providing all students with in-built insurance against spiralling debt and inability to repay". Under the current system, students begin to pay back their loans when they start earning £15,000 a year or more, and at a low interest rate.
It says: "The lack of a real rate of interest on student loans is therefore a subsidy which imposes high costs on the Government, and which exceeds the requirements of ensuring fair access to higher education. One way of modifying the current system is therefore that student loans should carry a real rate of interest; one which would be equivalent to the Government's overall cost of borrowing."
It adds the public costs of funding the student finance system could be reduced by lowering the threshold at which graduates begin paying back loans - which means they would begin paying them back earlier. The rate of repayment could also be increased, which could have an impact on the size of the contributions made. The submission says: "The current system of student support could be made more sustainable through addressing some of the poorly targeted and excessive subsidies provided."
Citing an example of current funding shortfalls, the submission says that it cost £14,190 to teach a chemistry undergraduate at a Russell Group university in 2007/08. The institution received £10,570 from tuition fees and grants - leaving a funding gap of £3,620.
The group suggests there are three "realistic" ways to remedy the current levels of annual deficits: reduce costs by cutting staff; increase income through raising fees for home undergraduates; increase income through increasing fees for overseas students. None of the options could be adopted by themselves, it says. But although the submission stops short of suggesting higher tuition fees for UK students, it appears to indicate that other solutions may not be fully workable.
Sally Hunt, general secretary of the University and College Union, said: "The future for the UK is, as the Russell Group report correctly identifies, as a high-skilled knowledge economy and that requires proper funding for our universities. We desperately need to overhaul how universities are funded and move away from the idea that the current review of student funding is merely a question of how much student fees go up by."
The Russell Group published their submission to the review today following pressure from students. The group had previously asked for it to be kept confidential, although they insisted they had always intended to publish it in due course. Lord Browne's review is due to report back to Parliament in the autumn. Both vice-chancellors and the business sector have called for higher tuition fees in the past. Tuition fees currently stand at a maximum of £3,225 per year.