Ministers must now decide whether Oxford and Cambridge universities should keep the special funds that underpin their unique college tutorial system or start to share extra funds with other universities with a proven record of excellent teaching.
The Government - and especially the Prime Minister - have been reluctant to move away from the present system of college fees, under which the two ancient universities receive some Pounds 35 million extra a year - or Pounds 2, 000 per undergraduate - to help fund tutors and libraries in individual colleges. While Labour ministers do not favour keeping financial privileges for the two richest universities, they do not want to be seen to attack institutions of internationally-recognised quality.
But, in confidental advice to the Government, the Higher Education Funding Council may have provided a solution. The council has proposed a new "premium for teaching quality" for which all universities would be eligible, but which would go only to those with departments assessed as excellent.
Oxford and Cambridge would certainly continue to receive substantial extra funds under this system. All 13 of the departments at Cambridge so far visited by the HEFC have been rated excellent for teaching quality.
However, many in the ancient universities fear that changes would reduce college funds, strengthen the central administration at the expense of individual colleges and damage the poorer colleges. Newnham College in Cambridge, for instance, depends on the college fee for 33 per cent of its turnover.
The council's review of the college fee system was requested by the Government in the light of a recommendation in the Dearing Report on higher education. Its confidential advice, finalised at a meeting last week, proposes the "premium for teaching quality", and includes a plan to phase in any changes.
The present system was vigorously defended by peers during a debate in the Lords on Wednesday.
But John Kingman, vice-chancellor of Bristol University, wrote to the Daily Telegraph last week urging the Lords and the Government to remember "that there are other universities which reach international standards in research, and which teach difficult subjects to the ablest young people, without the benefit of this additional public money".