The federal government is expected to ditch one of its most controversial budget measures - the plan to apply real interest rate to student debts - following advice from the architect of the HECS repayment scheme that it is unfair to poor graduates.
Detailed modelling by leading education economist Bruce Chapman has found poor graduates could pay 30 per cent more for a degree than their high-income counterparts if the government indexes student debts at the government bond rate rather than inflation.
Women who take time off work to have children would be among the hardest hit.
Professor Chapman's paper, which has been presented to Education Minister Christopher Pyne, presents two alternative interest rate proposals that would reduce inequity concerns but have only a small impact on the budget.
''Professor Bruce Chapman is a well-respected academic and analyst, and the government warmly welcomes his input in the higher education debate,'' a spokesman for Mr Pyne said.
Mr Pyne has previously told Fairfax Media he is willing to compromise on interest rate changes to pass his higher education package through a hostile Senate.
University vice-chancellors, who are confident the government will modify its interest rate plan, have come out strongly behind Professor Chapman's proposals.
Professor Chapman's modelling found low-income graduates (those in the bottom 30 per cent of earners) would amass total repayments of $105,000 from a starting debt of $60,000 under the government's plan.
By contrast, high-income graduates (those in the top 25 per cent of earners) would pay only $75,000 in total repayments on the same debt - $30,000 less than low-income earners.
Graduates on a median salary would pay around $82,000 in repayments on the same starting debt.
Low-income graduates would be hardest hit by compounding interest on their debts because they spend more time out of the workforce and have lower salaries.
''Using the long-term bond rate will be regressive and it is very hard to argue this is fair," Professor Chapman said. "HECS was designed to protect people who go to university but, because of bad luck or bad circumstances don't get to enjoy the benefits.
"HECS should act as an insurance mechanism and that aspect of the scheme is being undermined."
In the paper he and colleague Timothy Higgins propose two alternatives:
■ Only charging the higher interest rate when graduates reach the repayment threshold (approximately $50,000).
■ Or a one-off 25 per cent surcharge on a graduate's loan, with debts then pegged to inflation.
Under the first option, low-income earners would pay 6 per cent more in repayments than high-income earners - down from 30 per cent. The surcharge approach would wipe out the inequity altogether.
Universities Australia chief executive Belinda Robinson said: "There is agreement within the sector that the impact of applying a real interest rate to student loans needs to be modified to ensure continued affordability of a quality university education.
"The options in Professor Chapman's paper represent a fairer approach to student loans and are less likely to deter students from accessing a world-class university education."
University of NSW vice-chancellor Fred Hilmer said: "Both of these options would be better than the government's proposed interest rate changes."
Regional Universities Network Chair Peter Lee said: "Bruce Chapman is right: we need a different model to ameliorate the harshness of the government's proposal."
Australian Catholic University vice-chancellor Greg Craven said the government's plan would disproportionately affect nursing and teaching graduates. "I am confident the government is looking pretty carefully at alternatives …''
The government wants to deregulate university fees, cut student funding by 20 per cent and extend Commonwealth support to students at private colleges and sub-diploma courses.