Ministers are said to be considering savage cuts to university teaching grants of up to two-thirds, with funding for arts and humanities degrees being removed altogether.
Under plans expected to be set out next month, universities could be given more power to levy higher fees to make up the shortfall.
A major review of student finance is believed to be considering increasing the cap on tuition fees from ??3,290 to ??10,000 a year, although the maximum most students are likely to pay would be ??7,000.
Lord Browne, the former head of BP, will publish his recommendations in October, before the Government sets out its long-term spending commitments.
It is already feared that higher education budgets could be cut by a third, with universities forced to plug the funding gap through fee rises.
