Ministers are to put forward plans for a new system of grants to support students from low income families.

The move is expected to be announced later in the year as part of a government review of student finance.

Whilst the exact details of the system are still under consideration, Tony Blair gave a clear indication on Tuesday that the current system was failing some students.

"We have to find a better way to combine state funding and student contributions," he said.

The most likely outcome will be a means-tested grant which is made available to students from poorer backgrounds. Also under consideration is a blanket grant available to all and funded by a graduate tax - although this is considered the least likely option.

Under the plans, students loans will remain in place, ministers have made clear.

Speaking on Wednesday, Estelle Morris, the education and skills secretary, said student debt was a source of alarm.

"Four years ago we took the brave and right decision to expand higher education by changing the way we funded student support. However, it was clear during the general election that student debt was a major issue."

She conceded that the system of tuition fees and loans was discouraging teenagers from lower income families from entering the higher education system.