Government plans for universities to compete for some student places run the risk of establishing a two tier education system and should be put on hold indefinitely, a committee of MPs has warned. As it stands at the moment, English Universities have a yearly fixed number of student places, but in the future the Government proposes to allow institutions to take on a potentially unlimited number of the best performing students, and that 20,000 places will be reserved for universities charging students fees of £7,500 or less.

The Business, Innovation and Skills Select Committee is worried that this will result in a two tier higher education system, where more students, especially those with lower grades, will be funnelled into a "low cost model of higher education", essentially splitting the higher education sector into two, with the more traditional universities on one side and a lower cost alternative on the other. "This could have undesirable consequences for social mobility if able candidates from lower socio-economic backgrounds felt constrained to choose lower-cost provision", the committee says. "Further education colleges are capable of offering excellent low-cost and high-quality provision, but they may not offer the same experience as a student might receive in a traditional university."

The committee is especially fearful for the so called "mid-ranking" universities. They worry that such institutions will be likely to lose the higher performing students to their more prestigious rivals, and will not be allowed to bid for extra places under the £7,500 margin.

According to the Office for Fair Access, some higher education institutions have already responded to the Government's proposals. 24 Universities and 3 Further Education Colleges have applied to lower fees. MPs have called for a "student premium", similar to the pupil premium for schools. Deputy Prime Minister, Nick Clegg, announced a student premium last October, and it became a national scholarship scheme aimed at 50,000 students a year, providing a package which may include "fee waivers", discounted accommodation or even money.

The MPs' report also suggests that instead of waiving fees, money should be provided for students' living costs instead, as this would reduce the potential future debt students will find themselves in. The committee accused the Government of failing to communicate the charges properly and said they should have handled it better.

"A key aspect of the debate on the increase in tuition fees was disagreements over how much a student would expect to be charged for a university course," the MPs said.

The committee concluded that while most new undergraduates next year will be charged a tuition fee of £9,000, figures published by OFFA, which vets proposals to widen the social mix at universities, show that the average fee across the board will be £8,393. MPs said that the use of the average was "less helpful and relevant" to students than the most commonly charged fee.

The MPs' report says that "an unprecedented level of uncertainty" had been introduced in to university finances, and urged the government to use the £9,000 figure when publicising the reports. A wide range of factors affect how likely it is that student loans will be repaid, including the initial size of loans, the proportion of men and women - as male graduates tend to earn more than female graduates - and the future performance of the economy, the MPs said. "Regardless of the arguments both for and against a higher level of student contribution, the financial sustainability of the new system is untested. As a result, an unprecedented level of uncertainty has been introduced into higher education finances with success dependent on a large number of variables over which the government has little control." Adrian Bailey MP, chair of the committee said: "The government's reforms of higher education are wide-ranging and comprehensive. While we welcome the aim to put students at the heart of the system, that ambition will only be realised if the government deliver the reforms on time and as a package.

"The start of the new academic year is less than a year away and many key aspects of the reforms - including vital support for students - are currently out for consultation. The government will have to work overtime to deliver these reforms so that next years' intake of students has the information and support they were promised in exchange for their increased contributions to their education."