Funding for universities would be linked to the number of students who finish their degree and go on to get a job under a new model to be released by the federal government on Wednesday.
University funding will be tied to the number of graduates who get a job and student satisfaction with teaching standards under a new model to be implemented next year.
The government will invest an extra $80 million in bachelor-level courses, ending a two-year freeze on university funding, but tertiary education institutions will have to demonstrate success against four measures to access the money.
The performance-based funding scheme will take into account graduate employment outcomes, student success, student experience and participation rates of Indigenous and low-socioeconomic status students.
Mr Tehan said the model would provide an incentive for universities to produce job-ready graduates.
“This report shows that while we have a world-class higher education system, it needs to be stronger, more sustainable and fit for purpose,” Mr Tehan said.
Under the scheme, student success will be assessed by first-year dropout rates while student experience will be based on satisfaction with teaching quality.
Mr Tehan will present the final report on the scheme, prepared by an expert panel, to vice-chancellors at a meeting in Wollongong on Wednesday morning.
The report recommends that unallocated money remain in the higher education sector, but negotiated conditions be placed on universities that fail to meet the performance standards.
The panel suggested conditions may include additional reporting requirements or transparency measures or project-based initiatives.
"These conditions would be aimed at improving performance and quality in the areas where the university fared poorly."
Also on the agenda of Wednesday's meeting between the Education Minister and vice-chancellors is cyber security and the presence of controversial Confucius Institutes on university campuses.
The Australian Signals Directorate will brief administrators on how to ensure they have strong defences in place to protect information.
The briefing comes months after the Australian National University realised hackers had accessed nearly 20 years worth of data.
Mr Tehan said universities are high-value targets due to their valuable intellectual property and personal information.
"The ASD are experts in cyber security and can provide the guidance to ensure our universities are taking action to ensure their cyber security," he said.
Additional reporting by AAP