England's university system needs a radical overhaul to give more value to students and taxpayers, the universities minister has said.
In a speech in Oxford, David Willetts said Labour had left the system on "shaky foundations, without a viable long-term future".
Universities faced "tough times" and needed to find cheaper and more flexible ways to teach.
A review into university funding is expected to report in the autumn.
The review, led by former BP boss Lord Browne, is widely expected to say tuition fees should be allowed to rise - a move which would be opposed by Liberal Democrats.
In an interview with BBC News earlier on Thursday, Mr Willetts said the system needed to be changed to give a better deal for taxpayers and students.
Labour had left university funding in a "mess", he said, and the coalition needed to make £700m savings.
Mr Willetts told the BBC he did not want to prejudge the outcome of the review and was not "assuming that fees should rise", but that students should consider university fees "more as an obligation to pay higher income tax" than a debt.
Current fees in England are £3,225 a year and graduates pay the money back only when they earn a salary of £15,000 or more.
The National Union of Students said many already graduated with huge debts and accused the government of trying "re-brand" student debt.
In his first major speech since becoming universities minister, Mr Willetts suggested raising tuition fees would not be enough to solve the funding problems.
"If fees were to go up, the government would have to lend people the money to pay for them - and that would push up public spending," he said.
"It's not just that students don't want to pay higher fees: the Treasury can't afford them. So the arrangements we have now are clearly unable to respond to the current economic climate."
In his earlier interview he had said the current system was unsustainable but he did not want to "inflict misery on students".
"We do have a problem. As we've looked at the books we've found the Labour government left us an assumption of hundreds of millions of pounds in cuts in higher education without any idea about how to deliver them," he said.
In his speech, Mr Willetts said there were two weaknesses in higher education - that excellent teaching was not universal - and the "financial model" on which it operated.
"The changes enacted under Tony Blair were predicated on the good times never ending - heavily dependent on an increasing flow of money from the Exchequer," he said.
"Labour, yet again, left a system on shaky financial foundations, without a viable long-term future. There are universities struggling to make ends meet. Some have been prudent, but others have planned on the assumption of ever-rising budgets."
He said "big decisions" would follow the Browne review.
With more students wanting to go into higher education, provision did need to expand and the pressure on places this summer would be "intense".
Universities, he said, should "secure new funding streams" and innovate.
"We need to design a system that's built to last - and, given that we will need some radical thinking to succeed in the world we are entering, I suggest we think hard before deeming any proposition 'off limits', he said.
Students have reacted angrily to Mr Willetts' comments and fear fees will rise - and vary between universities.
Aaron Porter, president-elect of the National Union of Students, said: "Students will graduate owing an average of £23,500 and David Willetts' suggestion that students and families have somehow misunderstood the nature of student debt beggars belief.
"Students and their families aren't stupid and voters expect the government to be reducing student debt, not simply 're-branding' it."
He said students would not accept the introduction of a "damaging market" in education that would mean all but the most privileged thinking it was too expensive to go to university.
Mr Willetts is promoting the idea of students studying for a degree at any university in England, with lectures and classes being held at their local further education college or other institute.
"That means that you don't have the costs of living away from home but you do get a prestigious degree and that's actually how we spread our access to higher education," he said.
This would also help meet rising demand for degrees, he argued.
It would also be a far cheaper option.
The model the government has in mind is that of London University.
It has 45,500 students studying by distance and flexible learning in 180 countries. Another 6,000 students in the UK do the same.
This is on top of the tens of thousands of students - the majority - who do study at the university's institutions in the capital.
The university is made up of 19 colleges and institutes.
Thousands of other UK students already study through distance learning with the Open University and degree courses are also taught by some further education colleges.
It is the extension of universities into this area that the government is keen to encourage.
Record numbers of young people are applying to UK universities - applications for this year are up 16.5% on last year.
Once the Browne review has reported, parliament would need to vote on any move to raise the fees.
The Conservatives' Liberal Democrat coalition partners fought the general election promising to scrap tuition fees and are not expected to back any move to raise them.
The new deputy leader of the Liberal Democrats, Simon Hughes, has said it would be wrong to increase burdens on students.
"Our position has been that in a tight economic situation we need to think about university in numbers, we need to make sure there's value for money but it would be wrong to put more financial burden on students by way of tuition fees," he said.
"I honestly don't see the party voting to raise tuition fees and we're a democratic party, that's where our policy is formulated."
Professor Steve Smith, President of Universities UK, said: "We applaud the fact that David Willetts is raising key issues and underlining the importance of the quality of the student experience and the sustainability of universities.
"It's right that we debate the issue of undergraduate places and also what universities are delivering, particularly in the run-up to Lord Browne's review. As things stand, it's clear that the student funding system in its current form is unsustainable.
"But universities are committed to delivering a world-class student experience and will not compromise on this. Universities are already having to deal with a range of announced cuts so will not be able to maintain this standard or meet student demand if funding per-student is cut further."