Business Secretary Vince Cable is to propose a graduate tax linked to post-university earnings, replacing the current system of tuition fees, as part of major reforms to higher education.
Under the plans the government would pay tuition fees directly to universities, instead of lending to students.
Graduates would repay the cost of their degree once they start working, with higher earners paying more.
"We want to investigate an option which is clearly fairer and related to people's ability to pay," Dr Cable told the BBC's Today Programme, ahead of a speech at London's South Bank University.
Two-year degrees and more flexible, part-time courses are also expected to be suggested in the plans, as a means of cutting the cost of higher education.
The proposals will be investigated by Lord Browne in a sweeping review of higher education, to be published in the autumn.
The Higher Education Funding Council for England (Hefce) -- which was ordered by the government to slash its budget -- has written to universities confirming cuts of £200 million for this year, including £82 million from teaching grants.
The Universities and College Union (UCU), which represents lecturers, warned the government against "increasing the financial burden on the individual".
UCU general secretary, Sally Hunt, said: "If the government thinks it can get the public to swallow higher fees as some sort of graduate tax it is living in a dream world.
Tuition fees were introduced by the Labour government and first paid by students in 1998. Overall, students pay up to £3,225 a year, which must be paid back when graduates start earning more than £15,000 a year.
