The government is poised to sweep away the era of tuition fees by announcing a graduate tax that students would pay when they finished their degrees.

In his first major speech on universities, the skills secretary, Vince Cable, will outline plans for a new higher rate of tax payable by graduates. Under the system, the government would pay fees directly to the universities instead of lending money to students to cover the cost.

Tuition fees were introduced by the Labour government and were first paid by students in 1998. In 2004 Tony Blair risked his premiership by forcing through controversial top-up fees which have raised student contributions in England, Northern Ireland and for some students in Wales to £3,225 a year. That amount is payable after graduation.

Cable will also set out plans to slash costs in higher education which could see university degrees condensed into two years and more students living at home.

He is also keen to see the expansion of private universities, which could teach degrees that are then awarded by more established institutions.

The University and College Union, which represents lecturers, warned the government that a graduate tax had to be more than just a "rebranding exercise" that increased the financial burden on students.