Backbench revolt looms over higher tuition fees as Cable abandons graduate tax plan

The two most senior Liberal Democrat members of the Government were braced for a backlash from their party's MPs and activists after the option of a graduate tax was ruled out.

Ministers appear to have agreed instead to introduce variable interest rates on student loans so that high-earning graduates can be charged more on their borrowing while at university. Lower-earners would pay correspondingly less.

The package is likely also to include lifting the cap on tuition fees from 3,290 to at least 7,000 and possibly higher.

Lord Browne of Madingley's independent review of student finance was said to be recommending removing the cap altogether and creating a free-for-all, although that would be a highly controversial option for the Government to adopt.

But any increase in tuition fees at all will prove politically explosive for the Lib Dems, who campaigned against a rise during the general election. Mr Clegg, the Lib Dem leader and now Deputy Prime Minister, said in April the move would be a "disaster".

Mr Cable, the Lib Dem Business Secretary who has promoted the idea of a graduate tax that would allow fees and loans to be abolished, last night wrote to MPs saying that he now accepted Tory criticisms of the idea and it would not be pursued.

Backbench Lib Dem MP Greg Mulholland gave warning yesterday that he and others from his party would vote against any rise in tuition fees.

"It appears that the Government will not now certainly be pursuing a pure graduate tax, and certainly I think the fact is there is no easy solution to the structure of student funding, but that has to separate from the issue of fees and raising the cap on fees," he told BBC Radio 4's The World This Weekend.

"There are many of us, certainly in the Liberal Democrats and I suspect probably across the House to some extent, who are very concerned about that and will oppose any attempt to raise fees in the way that has been leaked from the Browne report."

Labour leader Ed Miliband sought to exploit Lib Dem divisions by reaching out to those MPs upset about the Government's plans. Mr Miliband said the mooted removal of the tuition fees cap was "very worrying" and "just a prescription for higher and higher fees".

The Labour leader, who has backed a graduate tax, was himself forced to play down a split with new Shadow Chancellor Alan Johnson, who has previously opposed such a move.

"What he and I are agreed on is you need a progressive system of student finance, and we will be working with people across the House of Commons who want that system," he said.

"I'll work with anybody in the House of Commons who wants a progressive system of student finance."

And he went on: "I think that students do have to contribute to their education, but it's a question of how they contribute and whether they contribute in a way that is fair or unfair and a way that promotes equal opportunity in this country or one that discourages it – and that's what worries me about some of the leaks we have seen about Lord Browne's report."

Lord Browne's report, commissioned by former Labour Business Secretary Lord Mandelson last year, will be published tomorrow.

The Department for Business, Innovation and Skills – which is responsible for higher education – refused to comment on the Government's plans until after the report.

But over the weekend Mr Cable wrote to Lib Dem and Tory MPs to say: "While it is superficially attractive, an additional tax on graduates fails both the tests of fairness and deficit reduction."

Comment: Page 10.