The  federal government's plan to cap the vocational education and training student loan program is no substitute for the lack of oversight that has marred the scheme since its inception, according to the head of a Canberra academy.

Earlier this month, federal Education Minister Simon Birmingham axed the current VET FEE-HELP scheme, describing it as one of the nation's largest policy flops.

From January 1 next year, VET student loans would only be available for a select number of courses, with caps of $5000, $10,000 and $15,000 dependant on the cost of delivering the course.

The changes must first pass the Senate, but Canberra's Academy of Interactive Entertainment chief executive John De Margheriti was concerned the replacement scheme would distil students into a "two-tier education funding structure".

He said installing an industry watchdog would be far more effective in stamping out shysters than capping student loans

"A strong regulatory body is necessary to prevent shonky operators from simply registering courses with high caps on the published list, on their scope and delivering them in a substandard manner so they can continue to make a profit. Caps on courses are not a substitute for strong regulatory oversight,"  Mr De Margheriti said.

The Gillard-era vocational education scheme was exploited by rogue operators who signed up students in some of Australia's poorest communities with courses they would never use and saddled then with tens of thousands of dollars of debt they could never repay, Fairfax Media has previously reported. 

Two days after the federal government said it would deliver a coup de grace to the  scheme, one of Australia's largest private colleges, Australian Institute of Professional Education, went into voluntary administration leaving up to 16,000 students in limbo.

Mr De Margheriti said funding caps would hamper the ability of training operators to provide quality teachers, resources and facilities.

He said the caps also removed "the ability for a student to choose what career they want, if they are unable to afford the gap between the cap and the course fee".

"Student choice is an important equity indicator.  All Australian students have access to a $99, 000 lifetime loan for their education under the HELP scheme, of which VET-FEE HELP is currently part of.  VET students should be able to choose to spend this allocation as they see fit, to follow their dreams and their preferred career choice without such discrimination," he said.

Mr De Margheriti said if the caps weren't abandoned then the introduction of the scheme should be pushed back at least 12 months.

Although the 144,000 current VET FEE-HELP students can apply to be grandfathered until next year, Mr De Margheriti said students enrolled in courses starting in 2017 would be left to foot the bill.

"There is little time for alternative funding arrangements to be made for students enrolling in courses starting in 2017. There are no details available for the banking industry to provide VET loan packages to help fund the gap between what the government new VET Student Loan scheme will pay for, and what the cost of a particular course is.  

"In addition, families and students who have applied for their chosen courses are now in a position where they have not been able to budget for funding the course fees on their own, as they were anticipating being able to access VET FEE HELP."