David Willetts: 'Many more will go to university than in my generation – we must not reverse that'

David Willetts is widely regarded as one of the most appealing Tories in Westminster, and he's certainly one of the most likable I've met. He is also the author of the best book I have ever read by a serving politician. His legendary intelligence is such that he has often been described as not so much a politician as a cerebral presence – and I can see why, for his manner has a donnish air of disinterested intellectual enthusiasm. Tricky questions are greeted with an eager "Ahhh!", as if this were a tutorial rather than an interview – and not one but two aides sit in with us, suggesting he might not be the most reliably on-message of ministers.

All of which goes a long way towards explaining his popularity on the left. What's less obviously explained is how he has managed to ride out the storm over tuition fees without taking very much of the blame. His announcement a year ago that fees would treble plunged the Lib Dems into their biggest crisis since the election, and will have cost them who knows how many votes. It cost the NUS president, Aaron Porter, his job. The only actor to emerge relatively unscathed from the great drama is, oddly enough, the minister for universities himself.

We meet not long after early figures released by Ucas indicated that student applications are down by 12%. Many universities that initially set the top fee of £9,000 are currently reconsidering, and applicants are complaining that if universities that had been beyond their budget now decide to lower their fees, they will only have a few weeks to apply to them. The government was apparently taken by surprise when so many universities opted to charge the highest fee, and alarmed by the amount of money it meant it would have to loan. But I still haven't heard a good explanation for the miscalculation, so I ask Willetts to explain.

"Well, we did the following calculation. We assumed that there would essentially be about 350,000 students, and that about 90% of them would take out loans, and that they would take out an average loan of £7,500. Now I read in the media that that's taken to mean me saying that we predict an average fee of £7,500. But there's no rule that says you have to borrow the exact amount of the fee."

So where did the £7,500 figure come from? "Well, that is our estimate." Based on what? "Well, the answer is – because nobody – what we're allowing for – it is an estimate based on things like, even if you've got a fee of £9,000, if you've worked in the previous summer and got £2,000 saved up, it will be perfectly possible to say I'm going to borrow £7,000 and put £2,000 towards paying the fee. So that's where – the assumption of the average loan of £7,500 is not an average fee." It doesn't seem any clearer, so I ask what he had anticipated the average fee to be.

"Well, we're shifting to a – nobody can be exactly sure what will happen. There's no obligation to take out a loan, and some people, if they've worked for a year beforehand, and might have done very well, there might be some people who don't take out a loan at all." I sincerely hope that isn't an example of the kind of thinking on which Willetts's calculations are based, because doesn't he know that the overwhelming majority of students who won't take out a loan will be funded by their parents, not their own earnings? "Well, it could be for lots of reasons!" he laughs gamely, suggesting that he knows perfectly well. He offers "a modest bet" that when the figures are finally in, his estimates "won't be too far off what happens". But he admits: "No one can know, I can't know."

It all sounds a bit back-of-the-envelope – a bit suck-it-and-see. I tell Willetts that if my child had ruled out certain universities based on their fees, and was now scrambling to redo their application because the sums keep changing, I would be pretty angry.

"Well, I would be very shocked if that's happening because they're not paying up front." Why would someone who believes in market forces be shocked when people obey them? Surely that's the whole point of creating a marketplace of different fees. Applicants' choices are influenced by the size of the debt they'll wind up with. But if so, Willetts says, this would be a terrible misunderstanding on their part, because although they may be taking out a "loan", they shouldn't think of it as a "debt".

"We're trapped in this language of debt. It's not like leaving university with £25,000 worth of debt on your credit card or anything. If someone said your child was leaving university with £25,000 on a credit card, you'd be quite rightly horrified. If someone said they're leaving university and during their working lives they're going to pay half a million pounds of income tax, you'd be completely relaxed. And our graduate repayment scheme is closer to – it's not exactly the same – but it's closer to the income-tax end of the scale than the credit-card end of the scale. If their earnings ever fall below £21,000, at that point any repayment stops. It's 9% of earnings only above £21,000. If you're earning £25,000, that's £30 a month. So it is a graduate repayment scheme that has many of the features of income tax. It's not like some debt around their necks." When I say nothing, he adds, laughing: "Honest! It's not!"

Analysis earlier this year found that some students who borrow the maximum loans could end up repaying more than £70,000. Surely he can see how frightening that figure looks? "But people should not be frightened. You're taking payments over a 30-year period, and piling it up and thinking of it as one sum. It's much better to think of it as a flow of payments over a lifetime."

He is starting to sound, I laugh, like one of those adverts on daytime TV flogging dodgy loans. "But it's not like any of those. This one's different. Honest!" he insists, laughing too. "I can't think of a fairer or more progressive way to pay for it." The fact that many graduates will in fact never repay their loans is, he adds, a "socially progressive feature of the system".

Isn't it odd that a government that is forever exhorting us to think more responsibly about debt is simultaneously advertising a loan with the promise that it might turn out to be literally on the never-never? "But it's not like a personal debt! It doesn't count in any personal bankruptcy proceedings." Which is true, but only because if it did, a lot of graduates would declare themselves bankrupt the day they got their degree.

Nevertheless, if it's a choice between a loan and a graduate tax, Willetts makes a strong case. "It has got all the best features of a graduate tax, but the crucial difference is that it's extinguished when you pay the cost of your higher education." Furthermore, as he points out: "All three parties in the past five years, when faced with this dilemma in government – how do you finance higher education when money is tight? – all three parties have essentially reached the same view."

It's a bit of luck for Willetts that the Lib Dems didn't think that way before last May, for it's taken the heat off him. Did he think it was foolish of them to sign the NUS pledge promising not to raise fees? He pauses, opens his mouth, then shuts it again. After a very long pause he says: "Well, we all – " and then he laughs. "I'm not going to go there. I've worked very well with my Lib Dem colleagues, and that's partly cos we don't get into who did what before the election."

He was an enthusiast for coalition government last May, and is even more so today. "Because it's a coalition, it's evidence-based. You can't get anywhere with an appeal to tribal loyalty."

It's no surprise that this suits Willetts, for tribal loyalty has never really worked for him. A grammar-school boy from Birmingham, born in 1956, he read Philosophy, Politics and Economics at Oxford, became Nigel Lawson's researcher, headed the treasury's monetary policy division at 26, and joined the No 10 policy unit two years later. By 31, he was director of the Centre for Policy Studies, and in 1992 was elected to Havant in Hampshire, becoming paymaster general in his first term.

Tory biographies don't come much more glittering than this, and everyone tipped him as a future prime minister. But he was forced to resign during the cash-for-questions scandal in 1996 following an allegation that he had improperly sought to influence the committee that was investigating Neil Hamilton, and his career has never really recovered. Westminster observers tend to attribute this not to the resignation, however, but to the reputation he acquired for being terribly intellectual. He was not quite One Of Us – too clever by half to be trusted by the party faithful. I ask if he thinks this reputation stopped him going further, and he laughs and shrugs. "Who knows? It's certainly of mixed value within the Conservative party."

In that case the nickname "Two Brains" can't have helped – and nor, perhaps, did what one Willetts fan described last year as a "slight chippiness towards the public schoolboys". Could that have been the problem?

"I don't think so. I hope not. One of the other great things about politics is it's so diverse." The cabinet isn't very diverse at the moment, though, so I ask if he thinks people's politics are informed by their personal background. "It doesn't matter what your particular experiences were, you have to be able to understand people." And yet it was Willetts who used to be a libertarian free marketer until he had children – and suddenly realised he did care what they watched on television, or what kind of society they grew up in. If becoming a parent had such a radical impact on his own politics, why would his old Etonian colleagues' personal experiences not shape their politics too?

"I've been lucky enough to be employed since university, but I hope that doesn't mean I can't imagine what it's like to lose your job. It's a challenge of imaginative sympathy. I think that is something David [Cameron] really has got."

David Goodhart, the editor of Prospect magazine, once admiringly observed: "Sometimes I find it hard to remember that he's a party politician." More recently, critics have wondered how the same man who last year wrote The Pinch – a brilliant analysis of how the baby boomers have "stolen their children's future" through their cultural, demographic and political dominance – could be the minister responsible for leaving his children's generation with a whopping great bill. "I kept the arguments of The Pinch in the back of my mind while we were going through all of this," he says. "And they will pay back less when they are starting off, and more when they are middle-aged, and that is a fairer shift of the burden." I'm not sure that answers the question, though, for his book is specifically about the unfair advantages the baby boomers have enjoyed at later generations' expense. When this generation's graduates are Willetts's age they won't become lucky baby boomers; they'll still be the generation he thinks has been unfairly burdened, only older. He makes a stronger point when he adds: "It has got better for people of this generation in one respect, because many more of them will go to university than in my generation, and it's very important that we don't reverse that."

Willetts's enthusiasm for the new fees system makes more sense when seen as just one part of a radical revolution in higher education. He wants to see a huge variety of institutions setting themselves up as universities – "just rent an office block and say you could study here for five key vocational qualifications," he has previously said – but I don't imagine that's the sort of university experience he would have wanted for his own son, 19, or his daughter, 23.

"Er, no," he agrees. What he loves about universities are the noticeboards: "There's some visiting big-name public intellectual, there's some indie band performing, there's an orchestra getting together to do a chamber concert, there's a play being put on. All that's part of the experience." But it won't be part of the ex-office block experience, will it?

"But that is not the only form of university. For some people – maybe aged 35 – going to university is what I call the transactional thing, to get the job they want to do. We have to get used to the idea that university is a generic term that covers several different ways to study."

Willetts is an admirable champion of adult education, eager to offer mature students a more intensive and affordable option than traditional universities provide. He cares deeply about the quality of education students receive, and wants to re-orientate universities' emphasis from research to teaching. But while an efficient and affordable ex-office block might well be a better option for mature students, I wonder whether he has fully thought through the implications of this revolution for the poorest 18-year-olds, who are likely to end up in the ex-office block too, still being charged for a "university" education but getting none of the experiences he or I enjoyed.

He sees the revolution being driven by "people who could come in and show how they could hold down the costs of higher education". But so far the only new institution announced has been not an educational Ikea but a Harrods – the New College of the Humanities, a private university set up by Professor AC Grayling which will charge fees of £18,000 a year. How does Willetts feel about that?

"Well, I believe in diversity," he says carefully, but then adds rather dismissively: "But if it's going to cost as much as the fees they're advertising, and be outside our loans scheme, then it looks as if it's something that isn't going to be available to the vast majority of people."

He offers this as if the new private university were an irrelevance – just a random anomaly – but I'm not so sure. The massive hike in fees, coupled with the creation of all sorts of different universities, will create a market for elite private universities of exactly this sort, which will attract not just the wealthiest students but the best teachers. Ten years from now it's easy to see how higher education will be dominated by an exclusive Ivy League-style group offering excellence to the very richest, and leaving most 18-year-olds in ex-office blocks.

"Erm, I don't think so," Willetts says mildly. But what could be done to stop that happening? "Well," he concedes, "it's a free country."