Theresa May speaks at the Policy Exchange think tank today. Photo: PA

Theresa May has urged her successor to bring back maintenance grants for the poorest university students in a move that could cost the Treasury up to £2bn a year.

In a speech today, the soon-to-leave-office prime minister backed a core recommendation of a major review into post-18 education funding that would reinstate grants, saying the move would “ensure students are supported whichever route they choose”.

“My view is very clear – removing maintenance grants from the least well-off students has not worked, and I believe it is time to bring them back,” she said.

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The government scrapped maintenance grants for university students in 2016, meaning that the majority now rely on student loans to finance their studies and living costs.

Philip Augar was commissioned by the Department for Education to conduct a review of how further and higher education in the UK is funded. Among the suggestions in his report published today is a plan to offer students from lower-income backgrounds a grant of up to £3,000.

A tapered system of grants could cost the Treasury up to £2bn a year, depending on how many students qualified, the review said.

Another of Augur’s major recommendations that May appeared to support was to reduce tuition fees to £7,500 from their current maximum level of £9,250. Universities should make up for the shortfall with “further efficiency savings” to correct “generous and undirected funding [that] has led to an over-supply of some courses at great cost to the taxpayer”, the review said.

The resulting savings to the Treasury should be directed towards maintenance grants and support for “high value and high cost subjects”, it said.

In her speech this morning, May said there was “much to be said” for the panel’s proposal to cut fees and allow the government to direct more funding towards courses it judged as more valuable. In recent years ministers have attacked what they call low-value subjects that do not lead to higher salaries or productivity.

She said ministers “need to look again at the level of tuition fees” since the vast majority of degrees now charge the maximum, rather than – as the government predicted when it introduced £9,000 fees in 2012 – only “the top universities for the highest quality and most prestigious and potentially lucrative degrees”.

However, the Treasury said a teaching grant proposed by the review to replace the cut in fees could cost £2.2bn, based on research by the Institute for Fiscal Studies.

Elsewhere in the review, Augar said the repayment period for student loans should be extended to ensure that all graduates pay off their loan during their lifetime. At the moment, graduates’ student loan debt is written off 30 years after they take out the loan. Unpaid loans are written off against the Department for Education’s balance sheet and an estimated 45% of the total amount loaned to students is expected to be written off.

At this year’s Spring Statement, the Office for Budget Responsibility estimated the impact of this write-off on the national deficit as £10.5bn, rising to £13.7bn in 2023-24.

The review also called on DfE to strengthen technical and vocational education by improving funding and coming up with a “more coherent suite” of qualifications to “help level the playing field with degrees”.

And it called for a £1bn capital investment in the upcoming Spending Review into reforming the further education system, along with additional funding to improve the recruitment and retention of FE teachers.

The Treasury said it had not approved the costings included in the Augar review, which included recommendations that would both save and cost the exchequer money.

And in an LBC interview this morning, chancellor Philip Hammond suggested that tackling the recommendations should wait until after Brexit. He warned that the review should not lead to a bidding war on public spending promises among candidates to replace May when she steps down as prime minister in the coming weeks.

"We won't be able to prioritise every area,” Hammond said.

“If we want to be able to spend some of that fiscal headroom that I have accumulated, we first have to get the Brexit issue resolved."

Former universities minister Jo Johnson attacked the proposal to cut fees as "bad policy, bad politics". He tweeted: "Looks like Augar (as predicted) will destabilise uni finances, imperil many courses & reverse progress in widening access.

"Reducing fees to £7.5k will leave funding hole HMT won't fill and benefit only highest earning grads at expense of general taxpayer."

And Alistair Jarvis, chief executive of the vice-chancellors' group Universities UK, said “The fee-level recommendations may look good for students, but unless the government gives a cast-iron guarantee on full replacement funding, it could prove to be a wolf in sheep’s clothing.”