The federal government would take over TAFE funding from the states under a radical plan to be presented to the states and territories at a high-level meeting in March.
Under the Turnbull government proposal, obtained by Fairfax Media, TAFE fees would be deregulated and TAFEs would receive the same levels of funding as private colleges in a bid to increase competition in the sector.
States could provide some top-up funding for TAFE, but only enough to ensure "competitive neutrality" with private providers under the shake-up, which would transform the vocational education and training (VET) sector.
The paper, marked "in confidence", has been circulated to state governments for discussion ahead of a planned Council of Australian Governments (COAG) meeting in March. It is likely to meet strong resistance, given the scandals that have plagued the federal government's vocational loans scheme in recent months.
Former TAFE Directors Australia chairman Bruce Mackenzie, who recently completed a major review of TAFE for the Victorian government, said the ideas contained in the paper were "clumsy" and "outdated".
Although the paper says a federal takeover would put downward pressure on fees, Mr Mackenzie said students would face higher costs and be saddled with increased debt if the proposals were adopted.
"This is like a prehistoric monster risen from the dead," he said.
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