One in three university students is dropping out without finishing their study within six years, new government data shows.
Universities have hit back at the Turnbull government's use of record low graduation figures to justify its proposed funding changes, saying it's just a Trojan horse for cuts.
Labor also weighed into the debate, arguing the government had "completely lost it".
New government figures released on Wednesday show the number of university students completing their studies within six years is at a record low.
Two-out-of-three students finish their course within six years, while the numbers of those getting jobs after finishing study were also below the highs of the past decade.
But Universities Australia pointed to the nine-year completion rates - with the newest data looking at students who started their study in 2007 - which have stayed stable at almost three-quarters finishing.
Chief executive Belinda Robinson said fewer than half of all university students now came directly from Year 12.
"Mature age and part-time students may take longer to complete their degrees because many of them are juggling study with full-time jobs, parenting and caring responsibilities," she said.
"This type of criticism is really a Trojan horse for the government's crusade to impose new conditions on university funding as part of a broader plan to deliver budget savings."
A separate report shows graduates are still finding it tough to get jobs quickly after finishing their degrees.
Only 67.5 per cent - or just more than two in three - had a full-time job within four months, the lowest level on record and a significant drop after employment rates had appeared to have stabilised between 2010 and 2012.
However, 89.3 per cent of the same group of students had full-time jobs when checked on three years later - the highest outcome since 2013, and the median salary grew from $56,000 to $68,700.
Education Minister Simon Birmingham says the new data shows universities had to "keep a laser focus on student outcomes".
Under demand-driven funding - where the government pays for as many students as universities want to enrol - educators needed to make sure they were taking students into appropriate courses and giving them the right support, he said.
However, the report shows about one-in-three institutions actually lifted six-year completion rates for students who began in 2010, when the demand-driven system started.
Part of the Turnbull government's stalled overhaul of universities would tie a portion of funding to improved student outcomes.
"We want to make sure the incentives are there ... to really focus on lifting those student outcomes, because that's about being fair to the students and giving them what they're signing up to," Senator Birmingham told ABC TV.
Labor education spokeswoman Tany Plibersek has labelled the performance funding plan a "ministerial slush fund".
"The Liberals have completely lost it," she said.
"You don't encourage more students to graduate from university by cutting funding, jacking up fees, and increasing student debt ... (or) by creating a slush fund so the minister can cut uni funding on a whim."
HOW UNIVERSITY STUDENTS ARE FARING
* 66 per cent who started in 2010 completed degree within six years
* 44.2 per cent who started in 2012 completed within four years
* University of Melbourne, University of Sydney, ANU had six-year completion rates higher than 80 per cent
* University of New England, Federation University of Australia, Charles Darwin University, University of Divinity were below 50 per cent
* 67.5 per cent of graduates form 2014 in full-time jobs within four months
* 89.3 per cent of same in full-time jobs by 2017
* Medicine and pharmacy graduates most likely to have full-time work
* Creative arts, tourism, hospitality, personal services, sport and recreation, and science and maths graduates least likely to have full-time jobs