In a new policy paper, details of which have been leaked to The TES, the party reveals its radical plan to overhaul funding for all students over 16. This would include long-term loans with repayments through income tax or national insurance contributions.
The scheme will increase pressure on both the Government and Labour to spell out how they intend to fund growth in further and higher education. Both parties are thought to be looking at similar proposals, but have so far shied away from making them public.
Currently students can apply for a loan to top up their maintenance grant. Tuition is free.
The Government is believed to be preparing a green paper, but it is unlikely to reveal its plans before the next election.
In 1993, the former Labour leader John Smith sacked Jeff Rooker, the party's further and higher education spokesman, after he came out in favour of a graduate tax. Labour is thought to have ruled out student fees, but publication of its plans has been put on hold.
The decision by the Liberal Democrats to slaughter one of its most sacred cows coincides with a threat from university vice-chancellors to charge students a Pounds 300 entrance fee unless a rational loans scheme emerges by December and money cut in the Chancellor's last budget is restored.
The new policy, which is to be published in the next two weeks, was drawn up by Don Foster, the Liberal Democrat education spokesman. He proposes that further and higher education be funded through a learning bank and individual learning accounts - an idea floated originally by the Social Justice Commission two years ago and known to be under consideration by the Labour party.
The scheme would mean post-16 education being paid for jointly by employers, taxpayers and students themselves.
Although the party has not spelled out the implications, students could be forced to pay up to a third of the annual average Pounds 2,140 tuition cost, in addition to maintenance costs.
Student loans, however, would be more generous than under the Government's current scheme. They would be repaid through tax and national insurance contributions acccording to income and over a much longer period, although the total paid by graduates would increase, as would contributions from the Government and employers.
The party is already committed to raising income tax by 1p in the pound to bankroll education, but around half of the extra Pounds 2 billion that would be raised has already been earmarked for a high-quality, high-cost expansion of nursery education. The change of tune on students is a recognition that the party cannot do this and maintain quality and expansion of higher education without raising income tax yet more.
Commenting on the paper, Mr Foster hinted that he anticipated criticism from party members at the next conference. "I could argue that our criticism was merely of [the Government's] funding mechanism, but I won't. This is a reversal of our long-time opposition to students making any contribution. The other parties have not let people see the colour of their money; we are putting our heads above the parapet."
The paper will also firm up the party's intention to topple A-level from its pedestal and "create a more flexible framework of qualifications balanced between the academic and the vocational". The plan would allow part-time students and people over 50, who currently get little or no financial support, to draw on their learning accounts to pay for courses. The party wants to allow more movement of students between FE and HE, but, said Don Foster, it will seek to " maintain the autonomy of individual institutions - there is no question of FE being subsumed into universities."
The way the proposals would be received by students would depend on "decoupling the words 'poverty' and 'debt'," he said. "Student poverty is unacceptable, but they may have to face up to the reality that engaging in further and higher education will incur a debt."
He implied that the prospect of debt would not necessarily act as a disincentive. "They will ask 'Can we pay it off without poverty, and have we got something worth having for the money?'."
The vice-chancellors' threat to charge university entrance fees has been coupled with a refusal to co-operate with "outside work" such as quality assessment and auditing.
The Committee of Vice Chancellors and Principals says that quality and expansion can no longer be assured unless the bullet of student contributions is bitten by all three parties. The militant mood in the sector has accelerated after a 31 per cent cut in capital funding was announced in the last budget.