The Turnbull government will hit universities with $2.1 billion in cuts as it unwinds the demand-driven system that ushered in a student boom at tertiary institutions and applies a cap to student loans.
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The government will freeze the amount it pays to universities for two years, before moving to a competitive system in 2020 with funding increases capped at the growth rate of the working age population.
This would effectively remove the incentive for universities to enrol as many students as possible, a legacy of Labor's aim to boost the proportion of young people with a bachelor's degree to 40 per cent.
Under the changes announced on Monday, students would have to begin repaying their student loans when they earn $45,000 – instead of $52,000.
There would also be a lifetime limit on government assistance of $104,440 for most students, and $150,000 for medicine, dentistry and veterinary science students.
The revamped savings package cuts about $550 million less than the changes proposed in the May budget, which could not pass the Senate. The government has largely found a way around that roadblock, as freezing payments to universities can be done without legislation.
"If you can't get to the out point that you're seeking to get to one way, you have to go another," Treasurer Scott Morrison said after presenting the mid-year budget update on Monday. However, changes to the loan repayment threshold will require Senate approval.
The Turnbull government is skeptical of the Gillard government's demand-driven system. Recently released figures show the subsequent student boom has evaporated, with only 1.6 per cent more applicants in 2017 than last year – essentially in line with population growth.
The number of places offered by universities was stagnant at just 0.1 per cent.
The government also argues many of the universities making hay of the uncapped system have high dropout rates, with fewer than 50 per cent of students finishing their degrees at institutions such as Central Queensland University, Charles Darwin University and the University of New England.
From 2020, universities will be forced to compete for fundings by meeting "performance targets". At the same time, funding growth for all universities will be capped at the growth rate of the working-age population.
Education Minister Simon Birmingham said the plan would encourage universities to improve their student retention rates and boost graduate employment outcomes. It would put the tertiary system on "a more sustainable, responsible path", he said.
Plans to introduce a 2.5 per cent efficiency dividend on universities, announced in the May budget, have been scrapped, and there will be no changes to student co-contributions.
Finance Minister Mathias Cormann said the plan reflected the government's desire to "moderate the rate of funding growth" for universities.
Funding remained at record highs in dollar terms but "the cost and quality of the system must be sustainable for future generations", he said.
Senator Birmingham said total Commonwealth funding for universities and students would grow by 11 per cent 2021 "if universities maintain their current enrolment patterns".
