The industry was blindsided by federal Education Minister Simon Birmingham's announcement of the overhaul on Wednesday, saying it was not consulted on the reforms that could "cripple" legitimate operators and limit student choice.

And independent experts warn the industry faces at least another 12 months of chaos and the loss of students to the higher education sector, with unknown implications for future skill shortages.

Senator Birmingham says the new Vocational Education and Training student loans program, which comes after years of scandal and waste in the sector, will save taxpayers $25 billion over the next 10 years.

Senator Birmingham's tougher regulations will create higher barriers to entry for new providers, limit eligible courses to those deemed to provide good employment opportunities, and introduce strengthened compliance and payment conditions, in what amounts to a major reassertion of the role of government in the vocational education market.

TAFE, public registered training organisations and universities will not be required to apply for registration under the new program, but all private providers will.

Student loans will only be available for courses that "align with industry needs" and loans would be capped in three bands - $5000, $10,000 and $15,000 - depending on course delivery cost, leaving in many cases a significant gap to be paid upfront by students.

Rod Camm, from industry peak body the Australian Council for Private Education and Training, conceded reform of the sector was long overdue, but said some of the measures would unfairly punish high-quality providers over those it aimed to stamp out.

"We welcome increased barriers to entry for providers and other measures that focus on ensuring quality outcomes for students, industry and the broader community," he said.

But he said the industry was deeply concerned about aspects such as the loan caps and the notion of government bureaucrats picking eligible courses, and that pushing upfront fees back on to students would have equity problems, sending poorer students out of the sector.

"Far from providing certainty for the thousands of private providers, it is almost inconceivable that sweeping reforms of this nature would be announced so late before implementation, and without consultation," he said.

"It's an odd policy for a Liberal government. A Liberal government should be about driving small and medium businesses ... And the notion of an artificial intervention into the market is not usual."

On Wednesday, Senator Birmingham said the former Minister for Vocational Education, Scott Ryan, released a comprehensive discussion paper to stakeholders before the election.

"Discussions and consultation roundtables were held during that process and that of course has all fed into the design of the new scheme that we're announcing today," he said.

Andrew Norton, a higher education expert from the Grattan Institute, said the implications for the industry were huge, and would not be clear for some time, throwing both private providers and students into prolonged uncertainty over their prospects for 2017.

"It's certainly going to radically reduce lending, and radically reduce scandals, which are two objectives of what they're trying to do.

"But on the other hand my feeling is it means that an industry already in chaos for years has another guaranteed 12 months of chaos and probably more image and reputational damage, because no one knows what's going on – and that's going to push some of these problems into the higher education space.

"The danger here is even though some students should be in vocational education, the relative stability and certainty offered by higher ed is going to encourage them to do that instead."

Ann Elisha, CEO of Australian Careers Business College, who has worked in the industry for 20 years, said the uncertainties unleashed by the reforms could "potentially cripple many quality private providers" at a key time in their marketing to prospective new students for 2017.

"It is truly irresponsible to paint all RTOs [registered training organisations] with the same brush," she said.

Despite this, business groups including the Australian Industry Group welcomed the change, with the Business Council CEO Jennifer Westacott expressly backing key provisions including the loan caps and course restrictions.

NSW Skills Minister John Barilaro welcomed the federal government's new approach as "the right one", and said the NSW Smart and Skilled model, introduced in January 2015, had led the way.

The government wants to have the new scheme in place by January 1. Senator Birmingham said it would "hit the reset button" on the VET FEE-HELP scheme, introduced in 2012 by Julia Gillard's Labor government.

The cost of the scheme to taxpayers blew out exponentially from $325 million in 2012, to $1.8 billion in 2014 and $2.9 billion in 2015 as student numbers quadrupled and fees more than doubled. Scandals over unscrupulous brokers signing up vulnerable students to courses they were unlikely ever to complete were exposed in the media.

Reforms to the scheme in April last year slowed the rate of growth in the loans, but Senator Birmingham said Wednesday "the waste and rorting and damage to vocational education simply cannot continue".