Plans to allow 50,000 would-be graduates a year to acquire "debt-free" honours degrees, part-funded by their employers, are being considered by Labour in order to tailor university education more closely to the needs of business and young people.

The ideas, being championed by John Denham, former secretary of state for innovation, universities and skills, are being fed into the party's policy review, which will shape Labour's manifesto for the 2015 general election.

Under the scheme, people in employment will be able to study for a degree relevant to their existing and future work, with the costs being paid jointly by government and their employers. The degrees would carry no fees and the in-work students would receive a wage or training allowance from their employer during their period of study.

Denham, who will outline the plans in a lecture to the Royal Society of Arts on 16 January, says the government's financial contribution will be found by redirecting money currently spent on writing off unpayable student debt from fees and maintenance loans, and on student grants.

"Graduates in England face the world's most expensive public higher education, yet too many degrees don't deliver what students or employers want," he will say. "Huge sums of public money are wasted writing off unpayable debts, and paying living costs for students who would rather have jobs.

"When money is tight, we must look at how higher education can offer a better deal for students and employers, not just at ways of forcing graduates to pay ever more."

The proposals are a development of the workforce development programme launched by the Labour government in 2008, which created 20,000 degree places. It was abandoned by the current government after it came to office in May 2010.

The ideas are likely to be welcomed by business groups. Last July the CBI said both universities and businesses needed to be more imaginative in the way they provided high-quality education that was relevant to the country's economic needs, and affordable for young people.

Katja Hall, CBI policy director, said: "The UK needs to vastly increase the stock of workers with higher-level skills to drive long-term growth and stop us falling behind our competitors. We need to tackle the perception that the A-levels and three-year degree model is the only route to a good career.

"When faced with £27,000 debt, young people are already becoming much savvier in shopping around for routes to give them the competitive edge in a tighter job market. Universities must be much more innovative to take advantage of the change in students' approach. And we need businesses to roll up their sleeves and expand high-quality alternative routes where degrees are not the best option for young people."

Under Labour's previous scheme, employers contributed, on average, about £3,000 to the cost of teaching the degree, with the rest provided by the state. Students would be able to study intensively over two years or mix work with study and take longer to get their qualification.

Denham says the proposals will prove attractive to many businesses as they will save money on recruitment and retention, having trained handpicked staff. They will also save on in-house training costs. Employers and students will also be able to shape the courses to ensure they are relevant.