Foreign graduates should be able to stay for two years after completing their studies, with universities then told to make sure students return if they are unable to find work, Frank Field has said.
"The university’s future quota will be determined by the number of students they successfully educate and who return home," Field said.
It comes as think tank IPPR has warned that Home Office figures on may be over-stating the numbers of foreign students overstaying after graduating.
And while Prime Minister Theresa May has ruled out a points-based system for migration reform, the government has yet to outline its vision for a future system.
Writing for The Times' Red Box political blog, Field also argued that new rules for permanent residency must take into account the need for boost the skills of the UK's workforce.
“Plans for a house building programme will be crucial here. The prime minister is insistent that her policies are ones of inclusion.
“Any major housebuilding programme must, therefore, include the social housing sector, and all tranches of money for house building must be linked to a skills programme,” Field said.
“The production of this skilled workforce will result in a reduction over time in the numbers of work permits issued to overseas workers.”
Field added May should offer free movement of goods into the UK economy, in exchange for free access to the single market for British services.
“A huge amount of effort will have to go into negotiating on the single market for that to be successful in a way that our European partners feel we are not encouraging everybody else to push for referenda as an opportunity to leave the EU,” Field said.