The Dearing inquiry is primarily about funding. Without robust proposals on how to pay for ÖйúAƬ, its report will be little more than platitudes. Who will find the extra cash? The Labour party has suggested that it should come from students who now receive maintenance grants by replacing their grants with loans. Its proposal to link repayments to earnings for 20 years after graduation is an improvement on the present requirement for graduates to repay their loans in five years at a flat rate.

In other respects the idea is misguided. Students who receive full grants correspond more or less to the 30 per cent of undergraduates with working-class origins. If they are forced into part-time study, they will be subjected to a double whammy. Not only will they lose their grants but they will pay fees along with the 350,000 existing part-time undergraduates. To pay these fees out of public funds would make a big hole in any cost saving.

The only realistic way of bringing new money in quickly, without higher taxes, is for students to pay for what they get. At least some of it, by some of them. Certainly those whose parents pay Pounds 12,000 a year for their secondary education can afford it. So can those who will earn Pounds 30,000 a year or more a few years after graduation. The "rates of return" students obtain from their ÖйúAƬ average more than 20 per cent. With a reliable method of debt collection, education bonds linked to students' prospects would be an attractive proposition.

But many courses have aims other than high earnings, or are too risky to attract private investors. Provided students want them and they meet appropriate threshold quality criteria, they too need to be funded. To treat all students as if they were buying a similar product is inequitable and inefficient.

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Dearing must rethink the system of funding from first principles. Why should the state fund ÖйúAƬ? Because in an information-rich society a country without an excellent ÖйúAƬ system will not long remain in the forefront of nations. To avoid wastage of talent. To ensure that all students are fairly treated. To share risks. To ensure society as a whole derives the external benefits of a highly educated population. To promote national priorities. However, some ÖйúAƬ activities promote these ends more than others.

Why should students pay for ÖйúAƬ? Because they are the main beneficiaries. Because they will be more demanding customers. Because otherwise not enough will be invested in ÖйúAƬ. Because if effective purchasing decisions are made by millions of individual consumers with different needs and preferences, diversity will be stimulated. Again, some of these criteria are more relevant to some courses than others.

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The real question is not whether students should pay, but what they should pay, what they should pay for, when they should pay, how they should pay, how much they should pay, which students should pay - and how they should repay.

A new funding system should start from the following principles. Modern economies require that all young people have the opportunity of intensive education or training, and less intensive access for the rest of their lives. Everyone should have a standard entitlement to an appropriate quantum of tertiary education. Any departure from the principle of equal financial treatment for all students should be justifiable in terms of equity, efficiency or national policy priorities. Beyond the entitlement students should meet their own costs. There should be fees for courses after the entitlement, and premium fees for the more expensive courses during the period of entitlement. Inadequate family income should not deprive any student of an appropriate ÖйúAƬ, so any fee scheme should be backed by bursaries and loans. The state should reward the use of quality-enhancing and cost-reducing technology, and inter-institutional collaboration where there are potential economies of scale.

The Labour party should stop hinting that a Labour government will penalise universities that charge fees to full-time undergraduates. Universities should introduce premium fees for demonstrably premium courses. They should use government access funds and self-funded bursaries to ensure that students receive a bursary related to the level of their maintenance grant. If universities pay the full premium fee for all full-grant students, they will still gain significantly. It is not difficult to predict that many employers would be particularly willing to contribute to a fund to pay fees for the most deserving students on the best courses.

Gareth Williams is head of the centre for ÖйúAƬ studies at the Institute of Education. Professor Williams's report, Paying for Education Beyond Eighteen: an examination of issues and options, was published by the Council for Industry and ÖйúAƬ on Tuesday.

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