It is said that the Government has asked vice-chancellors to keep quiet about the level of tuition fees they would like to charge their students until after next year's general election. I doubt that this is so Lord Browne and his team can deliberate quietly and thoughtfully about the issue and work their way through their spreadsheets in peace.

It seems much more likely that having scattered university, quasi-university and uni-lite institutions hither and yon across the country, Labour realises that the inevitable massacre of its MPs in marginal seats will only be made worse if vice-chancellors go around asking for an increase to ?6,000 a year or more.

The simplest way for the Government to save its MPs' skins (or seats) is to get out of the business of fee caps entirely. Universities are, in theory, autonomous, self-governing institutions. But for the ill-judged (and legally and morally dubious) legislation pushed through in the wake of the Dearing review of ÖйúAƬ, they would be able to charge whatever fees they thought the market would bear. Indeed, if they could face losing their teaching grant from the ÖйúAƬ Funding Council for England, they could as a matter of law still charge whatever fees they liked.

The London School of Economics is close to the point where it could do so because it is much less vulnerable than Oxbridge, University College London and Imperial College London to the threat of losing its research funding along with its teaching grant.

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Whether Hefce could survive a judicial review of any decision to cut research funding because of a breach of the fees cap is an interesting question. It's also one that none of the universities that could seriously contemplate forgoing their "T" grant could afford to ask: they would be bankrupt before they had briefed counsel.

The LSE shows one alternative route, which is to accept that teaching students to the level the Government wants is impossible on the money it makes available, so rather than lowering standards, it has dramatically increased the proportion of overseas students admitted on a full fee-paying basis.

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This is the route that many institutions have chosen without saying so too loudly, and one that mimics the American practice whereby state universities charge out-of-state students anything up to six times as much as local ones.

Still, it would be better by far for the Government to remove the cap, hand over whatever it thinks it can afford to students and institutions, and let them find what else they need by charging fees, finding benefactors or teaching more cost-effectively.

The Government has its sights set on increasing the number of students studying science, technology, engineering and mathematics (STEM) subjects. This is a good thing too, as long as the courses are rigorous, mathematically demanding and taught by people who know their stuff. It probably has a rough-and-ready view of how many students it wants to fund and therefore a rough-and-ready view of how much it is prepared to pay for them.

It therefore needs to do two things - one of which is already reflected in the Hefce teaching grant's "banding" system.

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The first is to hand out through the Hefce mechanism enough to fund a pretty basic education. If you want to see what that would look like, visit the campuses of the City University of New York; if you want to see what it costs, it's easy to find the annual accounts of places such as City College or Hunter College. Staff-student ratios are less than generous, and much of the teaching takes place in large or largish lectures. It is not very different from the pre-1992 polytechnics, which did an excellent job on meagre resources.

The second is to give the rest of the money to the students in the form of grants to meet fees and living expenses that are both means-tested and subject and ability sensitive - most for young people from low-income families who can bring three As in physics, maths and chemistry to the party, and least for the well heeled with mediocre records and a taste for undemanding courses.

Universities respond to student demand, and under these conditions the money would seem to students as though it were theirs. Institutions are often accused of taking no notice of students once they arrive, but even the ones not faced with the problem of putting enough bums on seats to pay the bills care about maintaining the quantity and quality of applications.

They would have to set their fees to square the demand for what they offer with the cost of providing it, less whatever resources they have to put into the pot. To secure quality applications they would have to provide value for money: faced with a real choice of where to go and what to pay, students would have far more incentive than they do now to discover what they're getting for their money.

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This would be far from a pure fees-based system, which is an impossibility outside a few vocational subjects. The $40,000 (?24,600) a year that Ivy League schools - and many others - charge for tuition is said to cover about half the cost of provision; endowment income and donations pay for the rest.

The UK's upper limit, outside such fields as law, medicine and the MBA, is in the region of ?20,000 a year, at which point anyone with a reasonable choice of destination would head for the US.

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The political advantage of going down this track for any government facing the horrible financial pressures of the next decade is obvious: there would be no point in the National Union of Students threatening MPs - by giving away the power to dictate fees, the Government would shed the blame for them, too.