According to Peter Mandelson, in order to combat the "severe and worsening" financial challenges that universities are under, tuition prices paid by students in England need to increase.

The Labour peer Mandelson, who is vying to become the next chancellor of Oxford University, claimed that increasing domestic undergraduate fees from £9,250 to £9,480 year would offer stability prior to the government implementing other changes to student funding and higher education.Mandelson, writing in the Guardian, said: “England’s universities have reached an inflection point. Financial pressures are severe and worsening.”

Mandelson argued for future tuition fees to rise alongside inflation, capped at a 2.5% annual increase. But Mandelson also suggested that universities needed more support to improve the numbers of students coming from disadvantaged backgrounds.

“I believe introducing some form of inflationary link to domestic tuition fees would be a fair approach, recognising the country’s very tight fiscal constraints and the need to steady university finances,” Mandelson said. “It would ensure fees do not become more expensive in real terms for students while securing the value of this income for universities. This would be a stabilising move ahead of further much-needed reforms both to improve university finances and make the loans system fairer for individuals.”

In return, Mandelson said universities would need to make “more tough choices” to improve efficiency, noting that Italian state universities had one teaching staff for every 21 students while UK universities had one for every 13.

Jacqui Smith, the skills minister, told a meeting at the Labour conference that changes to student maintenance funding were being considered.

“We totally hear the message that cost of living has impacted students almost more than any other group. And if you want to have the kinds of changes on access we’ve talked about, maintenance has to be part of it. That’s all I’m willing to say at the moment,” Smith said.

Mandelson also calls for a more progressive system of student loans, with repayments starting at 2% of a graduate’s income and increasing by 2 percentage points for each additional £10,000, up to a maximum of 8%.

Mandelson, the chancellor of Manchester Metropolitan University who will stand down from the role in January, said economists found that the progressive system had similar costs to the one in place now – which takes 9% of graduates’ income over £25,000 – by reducing repayments for low and middle earners and raising repayments for higher earners.

“This would be particularly beneficial for women, who are more likely to pursue degrees in subjects that are crucial to public services, such as nursing, but whose salaries can be comparatively low,” he said.

Tim Leunig, an economist and adviser to the Treasury and the Department for Education under the Conservatives, told a Labour conference fringe meeting that the current loan system should be scrapped in favour of a proposal involving graduates paying a minimum of £10 a week.

Leunig said the 40-year repayment term for student loans was “absurd” and should be halved to 20 years, with student loans no longer accruing interest. Instead, employers should pay a 1% surcharge on each graduate they hire, alongside graduates repaying at least £10 a week, and more according to their earnings.

Mandelson is the author of a chapter on university research and innovation in a “blueprint” for higher education, by Universities UK, an organisation of higher education institutions, to be published next week.

In it, Mandelson is anticipated to contend that, in line with nations like Singapore, research ought to concentrate on a narrower spectrum of technologies as part of a national economic strategy.

According to the plan, colleges should get more support from the government for research while also earning more money from outside partners and spin-off businesses.