Education Minister Simon Birmingham has warned universities it would be "a disgrace" if they cut places for regional students in response to $2.2 billion in budget cuts announced by the Turnbull government.
Senator Birmingham suggested universities should instead trim their profligate advertising programs to absorb the two-year freeze on Commonwealth funding contained in Monday's mid-year budget update.
Unlike the government's previous attempts to moderate education costs, the funding freeze does not require legislation and cannot be blocked by the Senate.
From 2020, growth in university funding will be based on performance, with Senator Birmingham eyeing higher completion rates, student satisfaction ratings and job outcomes as the key criteria.
Funding growth will also be capped at the growth rate of the working-age population, in a bid to unwind the Gillard government's demand-driven system that ushered in a student enrolment boom.
The end of that boom was an opportunity to "ask universities to really focus on the quality of delivery", Senator Birmingham said, and to repair the budget with a "modest contribution" from the tertiary sector.
In addition, students will have to start repaying their loans once they earn $45,000 a year - instead of $52,000. There will also be a lifetime limit on government assistance of $104,440 for most students, and $150,000 for medicine, dentistry and veterinary science students. However, those measures require Senate approval, with Labor understood to be reluctant.
Universities rubbished the freeze on Monday, arguing they will struggle to keep pace with inflation and that regional campuses will abandon growth plans. Newly built infrastructure would "go to waste", said Regional Universities Network chairman Greg Hill.
Education policy expert Andrew Norton, of the Grattan Institute, said it was unlikely universities would slash existing places, but they would be less inclined to expand expensive courses in health, engineering and science.
"This is going to break the dynamism of the system," he said. "The ability to adapt as the world changes will be lost by this - they'll have less incentive and less capacity to compete in the market."
However, Mr Norton supported lowering the HECS repayment threshold, arguing the current loan scheme "is just costing too much".
Senator Birmingham said the plan would stop universities "effectively writing their own cheque", and would put the higher education system on "a more sustainable, responsible path".
He told Fairfax Media universities should reconsider their "extensive" advertising, sponsorship and other brand-building efforts that have cost a reported $1.7 billion over seven years.
"I think it would be a disgrace if universities sought to target students of disadvantage for any consequences from these decisions when they ought to be able to find the savings within their own administrative budget," Senator Birmingham said.
He noted "universities retain absolute discretion about who they enrol", and the government had preserved "every single dollar of equity and disadvantage funding", including the Higher Education Participation and Partnerships Program.
Altogether, the new measures cut $600 million less over four years than what was proposed in the May budget. Plans to introduce a 2.5 per cent efficiency dividend on universities were scrapped, and there will be no changes to student co-contributions.
Labor's education spokeswoman Tanya Plibersek took aim at the funding freeze, saying the "back door" cut would mean bigger class sizes, and compromised education quality, for those who managed to get a university place.
The government remains sceptical of the demand-driven system, pointing to large spikes in enrolments at universities with poor student retention rates, such as Charles Darwin University and the University of New England.
But Universities Australia acting chief executive Catriona Jackson said the demand-driven system had "hit the sweet spot", with the number of young Australians with a degree now sitting just below the target of 40 per cent.
Demand has tapered off, with recently released figures showing applications grew by just 1.6 per cent this year - in line with population growth - while place offers were basically stagnant, rising just 0.1 per cent.
Vicki Thomson, chief executive of the Group of Eight, which includes Sydney University, ANU and the University of Melbourne, said the Turnbull government should stop using universities as a "cash cow" for budget repair.
She said the government's long-term plans for the university sector remained "opaque".