A Senate report on the Education Services for Overseas Students Amendment was tabled in parliament on Wednesday, aiming to address the federal government's proposed limits on overseas student numbers.
It acknowledges concerns raised by larger universities on the limits but says the automatic suspension and cancellation of courses do not align with Australia's skills needs.
However, the committee recognises the international education sector must be managed in a way that allows it to grow sustainably.
"(This would) delivers the greatest benefit to Australia, and maintains its social license from the Australian people," the report says.
From 2025, the number of overseas students able to come to Australia will be limited to 270,000, as part of a bid by the federal government to reduce migration to pre-pandemic levels.
The coalition said while it supported the caps in principle, the scheme was "riddled with incompetence, secrecy, uncertainty and unfairness.
"We hold deep concerns about the lack of adequate safeguards to ensure such caps are allocated appropriately, fairly and in the national interest," the report says.
"The coalition has consistently raised concerns that the government's student caps scheme is riddled with incompetence, secrecy, uncertainty and unfairness."
The $48 billion international education sector supports about 250,000 jobs across Australia, with overseas students having university fees three times higher than domestic students.
It comes as Australia's leading universities have tumbled down in world rankings, with some recording their worst result in annual standings.
The latest Times Higher Education World University Rankings showed the University of Melbourne was the top institution in Australia, coming in 39th place.
While the university retained its position as the leading campus in the country for the 15th straight year, it was the lowest position in the 21-year history of the global rankings.
The University of Melbourne slipped to its lowest position on the global rankings at 39th. (James Ross/AAP PHOTOS)
The next best Australian university was Monash University, down from 54th to 58th, followed by the University of Sydney, which fell from 60th to 61st.
The Australian National University went back from 67th to 73rd, while the University of Queensland rounded out the top five Australian campuses in 77th place, a drop from 70th the year before.
The rankings showed 17 Australian universities fall down the scale, with seven having their worst results.
Just four institutions - UNSW, Macquarie University, Deakin University and Federation University Australia - increased their position in the latest list.
While Australia had 12 universities inside the top 100 in 2021, it now has just 10.
Times Higher Education chief global affairs officer Phil Baty said there were serious warning signs in the sector in Australia.
"Australian universities are losing ground in terms of their global academic reputation (and) funding levels," he said.
"Perhaps most alarmingly, they are losing ground in areas of great traditional strength: international research collaboration and the attraction of international talent."
Mr Baty said the student caps could lead to Australia's international standings in the university sector being reduced.
"Many in the sector are very worried about forthcoming international student caps, which may further erode income for some top institutions, as well as diminish Australia's world-leading reputation as an open and internationally facing sector," he said.
The report said Australia's average score for international students had dropped for the second year in a row, following repercussions from the COVID-19 pandemic.
The higher education rankings are measured across 18 metrics, such as teaching, research and international students.
Oxford University came out on top in the global standings, followed by MIT, Harvard, Princeton and Cambridge.
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