England's universities have been humming as another wave of near 340,000 undergraduates begin their rite of passage into adulthood. University is their gateway to knowledge, a career and a future. But, above all, it is about learning to think for themselves, becoming themselves, even. For them, nothing will ever be the same again.

The university sector is one of the few parts of the English institutional structure that still works. Over the decades ahead, as new technologies, unleashed by digitisation, transform our economic base, the universities could and should be an important asset to the country, both as a fountainhead of knowledge and as a unique space for bringing together people, society, business and ideas.

Instead, the unsustainable system of student finance could so fragment the sector that not only will the standard university be endangered, so will the character of the elite. Neglect and the facile belief that market structures are the solution to everything could undermine a great system.

Complacency surrounds the new regime of £9,000 tuition fees. So far, admissions to university have held up, even if applications have fallen. The effort to persuade students that the repayment of up to £45,000 of debt works more like a graduate tax, affordable because your degree makes you more valuable, has plainly worked. Yet take a closer look and the picture is more disturbing.

Although the proposition was that there would be a range of fees, few universities charge less than £9,000 a year. Indeed, average fees are about £8,400. Accommodation and living costs have to be paid for on top, so that almost whatever university a student attends or whatever the degree taken, he or she will end up with about £45,000 of debt.

Even so, universities such as Oxford, warned its vice-chancellor last week, may have to charge more, given that government support for teaching has been emasculated (full declaration: I am principal of an Oxford college, Hertford, and also chair the Independent Commission on Fees). This is a fragile system that is going to break.

One fatal weakness is that English student debt (Scottish, Welsh and Northern Irish students have not been plunged into the maelstrom) comes with interest attached. At the very least, graduates are charged an interest rate equal to the retail price index, scaling up to the RPI plus 3% once their incomes exceed £41,000.

Today, this implies an effective top interest rate of a whopping 6.3%. Only the US has the same cavalier approach, but the average graduate debt there is a mere £15,700, with much lower interest rates, and a good third of American students leave with no debt. The English combination of high interest rates and sky-high debt is a unique double whammy. The impact of compound interest on debt that is only repaid slowly is deadly; only those students who earn very high salaries early in their careers can escape being locked into a debt trap.

There are insufficient jobs that pay enough to allow even a fraction of each year's 340,000 students to escape the trap. The average salary is £26,500. Only about 10% of the population earn more than £41,000. Even allowing for the fact that wages usually rise faster than prices (though they have not since 2006), it follows that many, perhaps even the majority of, students will struggle to fully pay back their debt.

So far, this realisation has deterred only mature and part-time students, whose applications have fallen by 14% and 40% respectively since the benchmark year of 2010. But the fall-away in the demand for courses, such as languages, that are wrongly felt to be worth less in the labour market, also shows the effect showing through.

Another pressure point is the falling applications from indebted English graduates to study for master's degrees and doctorates, especially in the humanities, and this is before the first cohort incur the full debt. Soon, the only graduates carrying on their studies will be the sons and daughters of the very rich or those poorer students who can secure one of the inadequate number of bursaries, scholarships and grants.

Yet graduate education is not just the university's lifeblood, supplying the next generation of academics, it is one of the core elements in any innovation ecosystem. It constitutes the principal pool from which the scientists, technologists, doctors, lawyers and intellectuals of tomorrow will be recruited. A key societal function is under threat.

Universities across the board are in a quandary. The real wages of academics have fallen by 13% since 2008, one of the largest sustained wage cuts any profession has suffered since the Second World War. Yet, unsurprisingly, students incurring the debt want to see some value for their money. Research has to be sustained. What to do?

Unless there is some bold political leadership, the future is becoming clearer. Oxford, Cambridge and a handful of other top English universities will want to charge more than £9,000 to support their expensive teaching ,while trying not to deter applicants by offering even more generous fee rebates and scholarships to undergraduates and graduates from disadvantaged backgrounds.

They would preserve themselves in the short term as premier academic institutions. But they would have caused an interdependent university system to fragment, leaving less strong universities in an impossible position, and further entrenching the noxious class stratifications in English society.

The rest of the university sector would increasingly be devastated: it would have to reconstitute itself around a limited range of digital courses and online learning in order to slash fees as students became more and more aware that the debt could not be justified by any job they are likely to get. The very idea of an interdisciplinary university, across the gamut of expensive disciplines, would become impossible. Our economy and society would be immeasurably weaker.

What is needed is a mixed economy of student finance. Universities create the public good of knowledge and thus more wealth; they should be paid for in part by general taxation and in part from moderate student fees on which negligible interest is charged. Fees in moderation are a good financing principle.

But loading the entire burden for university financing on to the shoulders of the innocent young, who are so inspiring to meet, with their ambitions to change the world, while their elders are washing their hands of responsibility, is a disgrace. England will pay a high price for such arrant selfishness.