The Government should scrap the "middle-class subsidy" of inflation-linked student loans and should raise the current ?3,000 cap on tuition fees, according to an influential economist.

Nicholas Barr, professor of public economics at the London School of Economics, told a National Union of Students debate last week that the current university funding system benefited high-earning City workers able to pay off their loans quickly, while those on low incomes were saddled with debt for many years.

At present, students receive government loans to cover the ?3,000 a year tuition fee and a loan of up to ?6,500 to cover living expenses. Once graduates are earning a minimum of ?15,000, the loans must be repaid. As interest is charged at the rate of inflation only, they are interest free in real terms.

Professor Barr said the ?3,000 cap on tuition fees should be set at a higher level, and that interest subsidies on loans should be targeted at people with low earnings. Loans should be written off for key workers such as nurses and teachers.

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"There are good reasons for having the fees cap. I campaigned for one," said Professor Barr, who is seen as one of the early advocates of student tuition fees. He has advised on fee policies in Australia, New Zealand and Hungary.

"I think it should go up, but it should stay," he told the Great ÖйúAƬ Funding Debate held by the NUS last week.

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When it came to the level it should be set at, this was "a balancing act", Professor Barr added.

"What I would say to the access warriors is don't perpetuate a middle-class subsidy any more than it has been already. My message to the market warriors - and I have met some politicians who are real market zealots - is don't overshoot.

"If you get rid of the fees cap, or it is too high, you are going to end up with something like the United States with fees going through the roof. That would be inefficient, it would be inequitable," Professor Barr argued.

He said that those who were serious about widening access should focus on attainment in schools.

Higher fees would bring in extra resources to universities and strengthen incentives to use those well, Professor Barr said. "I'm on the side of the students. Competition benefits the consumer, where the consumer is well informed ... I think by and large (students) are."

If the fees cap did go up, it would be essential that any increase was fully covered by an increased loan, he argued.

But the inflation-linked rate of interest on loans is costing the Government ?1.2 billion a year and Professor Barr believes the subsidised rate should be increased to cover the Government's cost of borrowing, which is not as high as commercial rates, with targeted interest subsidies for low earners.

"The people who benefit from the (current) interest subsidy are not students ... it is the fat cat in the City who finishes repaying his loan after seven years. It is targeted on exactly the wrong people."

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He went on: "What I would like to see - and I'll continue to bend the Government's ear about this - is the writing off of loans for selected groups, notably public-service workers; teachers, nurses, doctors."

Five to 10 per cent of carers' loans should be written off for each year of caring activity, he said.

But Neal Lawson, chairman of Left pressure group Compass, told the debate that raising the cap could cause universities to collapse.

"The whole point of them (variable top-up fees) is to drive institution against institution, student against student," he said.

"It is about conditioning your minds so that you don't rely on the state, you don't rely on each other, you don't rely on society or community. You borrow money, get up to your eyeballs in debt and then ... go out and earn as much as possible to pay it back."

Mr Lawson argued for a "graduate solidarity tax" to be paid by graduates when they went over the basic rate of taxation, with the money earmarked for ÖйúAƬ.

Deian Hopkin, vice-chancellor of London South Bank University, said that raising the cap would be "problematic". But if it were to be raised, he said, universities charging higher fees should receive less government funding.

The universities that did the most to widen participation would have to charge the lowest fees and should receive more state support for the public good they brought about, Professor Hopkin suggested.

Claire Fox, director of the Institute of Ideas, argued that the NUS should not put the student experience or the student voice at the heart of its campaigns.

"Treating students as arbiters of what constitutes a good education can lead to a situation where lecturers will not be able to exercise their professional or academic judgment in a way that actually benefits individual students."

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There was no point in having universities if it was impossible to tell the difference between them and "job credentialising institutions", she said.

rebecca.attwood@tsleducation.com.