Universities should not report students to the police, or exclude them from courses for possessing illegal drugs, according to the National Union of Students (NUS).
It also suggests that students should not be disciplined for drug-related behaviour that is not a criminal offence.
The call comes in a new report by the NUS which argues that simply disciplining students "fails to recognise the complex reasons that lead people to use drugs" and risks marginalising minority groups such as women and LGBT+ students.
Instead, students should be supported and given advice and information, it suggests.
Almost two fifths (39%) of students currently use drugs, and 17% have done so in the past, according to a survey of around 2,800 people conducted by the NUS as part of the report.
It defines drugs as illegal substances, such as cannabis, ecstasy and cocaine, as well as non-prescribed drugs and so-called "legal highs".
The survey indicates that the majority of those polled (62%) do not have a problem with students taking drugs recreationally, while many believe that universities and colleges should not punish those that do.
Overall, nearly half (47%) agreed that institutions should not penalise students who take drugs, with 27% disagreeing.
"The findings from our study call into question both the effectiveness and fairness of a punitive approach when addressing student drug use," the NUS said.
"Policy responses that focus solely on disciplining students fail to recognise the complex reasons that lead people to use drugs and therefore there is a risk that they may only serve to further marginalise certain groups of students, such as poorer students and those from a liberation background."
It goes on to argue that "students should not be disciplined for drug-related behaviour that does not constitute a criminal offence" such as possessing drug paraphernalia.
And the union says that students "should not be reported to the police or permanently excluded" for possessing an illegal drug.
"If a student is reported to the police for a suspected or alleged drug offence (eg supplying a controlled drug), they should be signposted to legal advice and information services," the report adds.
It argues that mental health is a key factor in drug use by many students, and that certain groups, such as women, LGBT+ and disabled students were more likely to take drugs for mental health-related reasons.
Data gathered from universities shows that institutions have different ways of dealing with students caught in possession of drugs, the union claimed, with just over half saying that "no further action" is a possible outcome.
The most common disciplinary action is a formal warning, followed by temporary exclusion, permanent expulsion and then reporting the student to the police.
"In the 2016/17 academic year, there were at least 2,067 recorded incidents of student misconduct for possession of drugs," the report says.
"While many were resolved via a formal warning or another type of sanction, such as a fine, at least one in four incidents (531) were reported to the police.
There were 21 permanent exclusions from higher education for possessing a drug for personal use."
A foreword to the report says: "The findings in this report paint a complex picture of student drug use, one that has both positive and negative impacts on students' lives. In doing so, it contrasts with some university, college and students' union drug policies, which see student drug use wholly as a problem to be eradicated through suspensions, evictions and surveillance.
"We believe that these punitive measures rarely help. Instead, they make our educational institutions complicit in practices that prevent marginalised and potentially vulnerable students from seeking help and support when they should be minimising any harms associated with criminalisation and of drug use itself."
Professor Steve West, chairman of Universities UK Mental Health in Higher Education Working Group, said: "We welcome this new survey from the NUS. It is important that students have access
to support services that reflect their needs.
"Universities cannot address drug misuse alone and, working with the NUS, we need to establish closer working partnerships with schools, employers, the NHS and other statutory services to coordinate care for students.
"Mental health and well-being needs to become a core part of all universities' activities, this should be part of their offer to all students and staff."