Universities should adopt a US-style "grade point average" (GPA) system alongside traditional degree classifications to motivate students to work hard throughout their courses rather than just for final exams, the Government has recommended.
The recommendation is part of a sweeping package of proposals which could see institutions judged to provide high quality teaching allowed to hike fees in line with inflation.
The reforms would also create a fast-track system to allow new institutions to gain powers to award their own degrees and be classed as a university.
The new teaching excellence framework (TEF) established by the system will give students more information about the kind of tuition they will receive and their likely career prospects after graduation.
The TEF will use measures including student satisfaction, student retention rates and graduate job prospects.
Institutions deemed to be providing high quality teaching would be allowed to raise fees to keep pace with inflation, but universities who fail to meet expectations would risk losing income.
The Department for Business, Innovation and Skills (Bis) proposals also recommended a change to the historic system used to classify degrees into firsts, 2:1s, 2:2s and thirds.
The TEF will "encourage providers to adopt the grade point average alongside traditional degree classifications," Bis said.
"The GPA uses a 13-point scale and takes account of student performance during their course, not just in final exams.
"This can help to engage and motivate students to work hard throughout their courses and gives employers more granular information about student performance".
The green paper plans would also establish a "level playing field" in regulation of new and established universities and "speed up the process by which a new provider can gain powers to award their own degrees and call themselves a university".
The higher education green paper - Fulfilling Our Potential: Teaching Excellence, Social Mobility and Student Choice - proposes a shake-up in the regulatory system.
The changes would see the Higher Education Funding Council for England (HEFCE) merge with the Office for Fair Access (Offa) to create a new Office for Students.
The new watchdog would have a "clear duty to promote the student interest when making decisions", Bis said.
It would have the power to force universities to release data "in order to better inform students" and help efforts to widen participation for disadvantaged students.
As part of the green paper package, a social mobility advisory group would report to the universities minister with a plan to meet David Cameron's goal of increasing the proportion of disadvantaged students entering higher education and increasing the number of black and minority ethnic students by 20% by 2020.
Bis will also consult on reforms to "reduce the burden and costs" of the Research Excellence Framework but will "ensure we continue to support excellent research across the UK", officials said.
Universities and science minister Jo Johnson said: "We must do more to ensure that the time and money students invest in higher education is well spent.
"Our ambition is to drive up the quality of teaching in our universities to ensure students and taxpayers get value for money and employers get graduates with the skills they need.
"The new Office for Students would have a clear remit to champion value for money and the student interest in its decision-making.
"And by opening up the sector to new universities and colleges, students will have more choice than ever when they come to apply to university."
A consultation on the proposals will run for 10 weeks, closing on January 15 next year.
Universities UK president Dame Julia Goodfellow said: "The UK higher education sector is recognised around the world for its high-quality teaching, learning and rates of student satisfaction. We welcome the Green Paper's emphasis on protecting the interests of students and demonstrating the value of a university education.
"The recognition of high-quality teaching in our universities is a welcome step, but we must ensure that this exercise is not an additional burden for those teaching in our universities and that it provides useful information for students, parents and employers."
Sir Peter Lampl, chairman of the Sutton Trust and of the Education Endowment Foundation, said: "With the access gap at our most selective institutions still unacceptably wide, today's Green Paper, its commitment to improving higher education access and the Prime Minister's ambition to double the number the number of disadvantaged young people going to university by the end of this parliament are welcome."
Richard Lloyd, the executive director of consumer group Which? said: "We have been campaigning for students to get better information so they can make an informed choice about where to study and ensure they get value for money.
"The Government is right to recognise that students' interests must be central to higher education reform."