The reforms would have led to university fees increasing by 7.5 per cent, the HECS repayment threshold falling from $52,000 to $42,000 and university funding being cut by 2.5 per cent through a new "efficiency dividend".

The government wanted to raise minimum fees by $2000 to $3600 per year for a four-year degree with a maximum payment of $50,000.

The changes will now not pass the Senate unless they are split into separate bills, forcing the Turnbull government to back down from its third attempt at widespread university funding reforms in the past three years.

With Labor, the Greens and Jacqui Lambie opposed, the government had to secure 10 of 12 Senate crossbench votes to pass the legislation, an impossible task without the three NXT votes.

"Until there is a comprehensive review into post-secondary education, it would be wrong to support many of the cuts proposed by the government," NXT education spokeswoman Rebekha Sharkie said on Thursday.

"We have too many highly qualified young people with PhD degrees stacking supermarket shelves or making lattes. We need to do better than this," Senator Xenophon added in a statement.

Education Minister Simon Birmingham described the NXT position as "irresponsible," after NXT called for an extra $15 million in funding.

"We will consider the options of this decision for higher education policy and, as always, will also ensure any budget implications are addressed," he said.

"We are appalled that the troika of Labor, Greens and Xenophon parties are unwilling to make even modest reductions in the rate of spending growth, which under our reforms would still have increased university funding by 23 per cent over the next four years.

"Senator Xenophon's unacceptable approach would further grow the taxpayer-funded student debt burden and deliver even faster revenue increases for universities."

The government does have other cuts at its disposal that do not necessarily require the passage of legislation through Parliament.

A nuclear option would be to put a cap back on student numbers limiting funding for university places.

The other would be to put limits on the $600 million Higher Education Participation and Partnerships Program program that grants students from low socio-economic backgrounds scholarships to attend university.

Universities Australia chief executive Belinda Robinson, who has been lobbying the Senate crossbench to oppose the move for months, hailed the decision as "a victory for common sense".

"This is an opportunity for government to hit the reset button and stop, once and for all, treating our university sector as a target for budget savings, when in fact it is an investment in Australia's future," she said.

The rejection means fees for students at universities will likely remain the same as they are this year after adjusting for inflation.

The peak body for Australia's leading research-intensive universities, The Group of Eight, said it will work with NXT and the government on implementing a Gonksi-style review of university funding.

The Turnbull government announced a sweeping review of school funding dubbed Gonski 2.0 in May that would re-establish the allocation of resources to schools based on need.

It was named after the original architect of the Gonski reforms, Sydney businessman David Gonski.

Chief executive Vicki Thomson said she work with the government on the design of a comprehensive review of the post-secondary education sector including teaching and research funding and students charges.

"We wholeheartedly support such a review," she said.