Fees can be up to £3,000 - with Whitehall strings

Key points

• Universities to keep all top-up fees raised and they will be wholly additional to the amount received currently from government for teaching
• New access regulator must be satisfied that targets for widening participation are justified and have been met
• No student will pay upfront but universities will receive the additional top-up cash upfront from the outset in 2006
• Leadership Foundation proposed to build a 'cadre of professional leaders and managers'

Top-up fees will bring financial freedom for universities but it will come at the price of greater responsibility.

From 2006, universities will be able to charge up to £3,000 a year for courses. They will be able to vary fees below this amount as they see fit, and even charge nothing for a course.

Fees could be varied by subject, and be levied for departments or across entire institutions. Top-ups will apply to all higher education qualifications, including foundation degrees.

Currently, all course fees are capped at £1,100 a year and universities are reimbursed by the state for the 43 per cent of students who pay nothing because their parents earn too little. Another 20 per cent pay part fees.

The £1,100 means-tested fee will be retained but, from 2006, universities will be able to decide whether to top this charge up to a maximum of £3,000.

The £1,900 top-up element will not be means-tested so, university bursaries and other support aside, students will have to decide whether it is worth paying the extra money for a preferred course or institution.

Universities will get to keep all the top-up fees raised, the private contributions to the £1,100 means-tested fee element and all state reimbursements for full and part-fee waivers to the means-tested element.

The top-up fees will be additional to the amount that universities get for teaching at the moment. This is because the government will maintain the proportion it contributes to teaching at today's ratio, whereby the state pays roughly 75 per cent of the average cost of tuition, with the £1,100 means-tested fee representing the remaining quarter.

The government said it was impossible to calculate how much top-up fees could raise for the sector, although education secretary Charles Clarke has said that a university such as Oxford, charging £3,000 for all courses, might raise about £20 million. But not all universities will charge up to £3,000. It is also impossible to say how many universities will offer bursaries.

Variable fees, up to the £3,000 cap, are justified in the white paper because students get different returns in terms of future earnings from different courses. Figures in the paper for female graduates show that earnings premiums are highest for law and architecture. All universities will be able to charge the maximum for at least a few of their courses that have proved to benefit graduates significantly.

It would be safe to say that the top-ups will generate hundreds of millions of pounds a year for the sector. This is on top of the government's ongoing commitment to state funding for higher education. Funding will rise to £10 billion in 2005-06 and the white paper says that state support at this level is justified by the contribution of universities to the economy and society.

And while no student will pay upfront, universities will receive the additional top-up cash upfront from 2006. This is because the fees are loaned to the student by the state. From the Treasury's point of view, a loan that is repaid by graduates is budget neutral.

Top-up fees are vital to universities' future success, according to the white paper. It says that universities need freedom to raise their own funding and gain independence from the government if they are to flourish.

It concedes that they are already free and autonomous institutions but says that they "do not always use the freedom they have to the full". Legislation prevents universities from exercising their power to charge top-up fees and that is what the government plans to change in 2006.

The white paper goes on to talk about empowering universities to become "dynamic and self-determining". But this freedom will come at a price. Responsibility is the key word in the white paper.

As a first step to getting their hands on top-up fees, universities must satisfy a new access regulator that their targets for widening participation are justified given the current socioeconomic mixture of their students. Then they will have to hit their targets.

Having made that step on the road to freedom, the white paper says that there will then be more need than ever for strong leadership and management in the sector, not least to assuage Treasury concerns that universities will not squander the extra cash they raise from top-up fees.

The paper proposes a Leadership Foundation to build a "cadre of professional leaders and managers", and promises government support for management development on the grounds that universities generate about £35 billion a year for the economy.

The paper says that freedom will force institutions to improve their efficiency. It says that some weaker institutions have been propped up rather than turned around. The white paper also warns that there is still scope for rationalising resources to improve cost-effectiveness. For many institutions, this may mean merger and strategic alliances.

Freedom and responsibilities go further. The white paper says that it is unrealistic to expect the government to match the funding levels of the world's best-endowed universities.

One of the government's aims is to make UK higher education less dependent on any one source of funding by enabling universities to exploit a range of money-raising opportunities to build substantial endowment funds.

It suggests that endowments could be used for things such as new facilities, student scholarships and pump-priming research funding bids. But it says that universities would need to work to make the most of their potential endowment incomes.

Encouraging giving by alumni, many of whom enjoyed free education, is encouraged. The government will do its bit by making it easier to contribute through gift aid and the tax system to students' former institutions. It will encourage the sector to develop a standardised gift-aid form.

The government is also to set up a taskforce to develop and promote incentives for individual and corporate giving.