Welsh students studying in Wales currently pay lower fees than students elsewhere in the UK.
The Welsh education minister has unveiled proposals to scrap the £1,890-a-year grant every Welsh student in Wales receives towards tuition fees.
Jane Hutt wants a "significant proportion" of funding, currently £61m, to be redirected to helping students from lower income families from 2010.
She said the grants would still be available on a means-tested basis for those from middle income households.
An independent review fears the existing system causes "disparity".
Welsh students studying in Wales pay £1,200 in fees - rather than £3,000 for students from other parts of the UK.
Under the proposals outlined to assembly members on Tuesday by Ms Hutt, this system would be overhauled to enhance the use of more assembly learning grants - which are available to all students who normally live in Wales.
Ms Hutt said she also wanted measures to provide debt relief to graduates and said she was pressing the UK government to index link the subsidised loan repayment threshold.
She told AMs: "The combined effect of more generous assembly learning grants, and increased access to student loans, will mean that the maximum help available to low income students will be enhanced.
"I believe it is right that we concentrate our help on those who need it the most and do everything we can to wider access to participation in higher education."
A consultation period will follow.
The changes will be phased in from September 2010 and will not affect those students currently in the higher education system.
Welsh higher education institutions need to compete on a level playing field with the rest of Britain and the rest of the world
Andrew RT Davies - Welsh Conservatives
An independent review panel, chaired by Professor Merfyn Jones, said the current system was not the most effective way of attracting more people into universities.
The grant towards the fees is currently given to every Welsh student studying in Wales but the review group's report warned it could place even greater pressure on student finance budgets as more and more students take advantage of it.
Because of EU rules it is also available to non-UK students from the EU but not to those from the rest of the UK who study in Wales.
The report also wanted student loans to be made more flexible and include repayment holidays, such as those offered to students who normally live in England.
Under the new proposals, those on a lower income could instead receive £5,000 in the form of an assembly learning grant.
About a third of students normally living in Wales currently receive a learning grant.
The assembly learning grant can be used wherever in the UK a student chose to attend university.
Wales' fee regime was agreed as part of a cross-party deal in 2005 but a review of the cap on how much universities can charge, currently £3,145, it to be held next year.
The report, parts of which were leaked to BBC Wales last month, said the assembly government should "significantly increase" the level of a means-tested learning grant to students from low-income households.
It calls for money to be invested so an estimated "funding gap" of £61m between Wales' universities and England can be closed.
If ministers do want to keep bright students in Wales, they have been told to think about making universities more attractive by increasing higher education funding and offering more bursaries and scholarships.
"This would enhance student choice, encouraging students who live in Wales to choose to stay rather than experiencing a financial pressure to do so," the report said.
Welsh Conservatives' education spokesman Andrew RT Davies said: "Welsh higher education institutions need to compete on a level playing field with the rest of Britain and the rest of the world.
Welsh Lib Dem leader Mike German said: "We should continue to invest the same amount in this process until 2011, then it would be a manifesto commitment and election issue."
Meanwhile, the National Union of Students (NUS) said it wanted substantially more grant available to students from poorer backgrounds and the introduction of a national bursary scheme with a value of £6,000 for the poorest students.
The review team now moves onto a second phase, to report on the "mission, purpose, role and funding of higher education in Wales" by March 2009.
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