New tax-free investment accounts should be set up to allow prospective students and their families to build up savings to cover the cost of going to university, a think tank has suggested.

The Centre for Policy Studies (CPS) proposal would mean that tuition fees and living expenses could be met from assets rather than the current system based on loans.

The Education Saving Plans would be based on existing junior Isas, but would have fees capped at 1% and providers would be compelled to put a portion of that charge into a fund to provide bursaries to poorer students.

The aim of the plan would be to create a US-style system where potential students build up a university fund before their course, rather than rely on loans.

The CPS paper said: "The current system of promoting debt as the means to higher education should be reassessed.

"Upon graduating, students are faced with debts on average in excess of £40,000, which they will spend most of their lives paying off.

"It would be better for prospective students to be encouraged to finance their studies with savings.

"Building on the success of the junior Isa and Child Trust Funds, a new savings plan should be introduced: the Education Savings Plan.

"This will help to ensure that young people and their supporters are not discouraged by concerns over student debt and tuition fees from aspiring to higher education.

"A scholarship and bursary fund for the financially disadvantaged would also be created by providers of Education Savings Plans. This fund would contribute a portion of providers' fees into a pooled charitable trust to be used by universities and colleges to offer scholarships and bursaries to students unable to maximise contributions to their own Education Savings Plan."

The think tank estimates that around £37 million could be generated for scholarships and bursaries every year under the plan.