The Federal Government has acknowledged some overseas students will be angry as it revamps Australia's skilled migration rules.

Immigration Minister Chris Evans is immediately scrapping the list of jobs used to pick migrants, replacing it with one more focused on highly-skilled work, meaning some overseas students will lose the chance to apply for permanent residency.

If the job they are studying for is not on the new list, foreign students will not be able to apply for a permanent residency visa unless an employer will sponsor them.

Senator Evans says in recognition of the problems the changes could cause for colleges and existing overseas students, he is temporarily allowing them to spend 18 months in Australia after graduation to work and seek sponsorship from employers.

He has also announced that around 20,000 people who applied for skilled migrant visas before September 2007 will have their applications cancelled and their fees refunded.

Senator Evans says the current list of jobs is distorting the economy.

"We had tens of thousands of students studying cookery and accounting and hairdressing because that was on the list and that got them through to permanent residency," he said.

"We've found that a lot of highly-skilled people with higher education degrees or a lot of overseas experience aren't passing the points test where people with a lower-level qualification and some education in Australia were.

"So we want to make sure we're getting the high-end applicants."

Senator Evans says the Government will announce the size of the migration intake for the year in the May budget, but Opposition Immigration spokesman Scott Morrison says the Government should not cut the proportion of skilled migrants.

"What I wouldn't want to see is a retreating on skilled migration - a lowering in the number of people proportionally that are coming under the skills program versus the family program," he said.

"Because the greater percentage come on the family program - that's higher levels of benefits that have to be paid out, higher levels of strain on the health system, higher levels of strain on other forms of assistance that is provided."

Mr Morrison says he will be watching how the Government handles the backlash from colleges and students.

"It's quite clear that there will be many colleges I suspect that will go out of business," he said.

"There'll be people who are currently studying courses who'll find themselves caught between a rock and a hard place, and we'll find out just how well the Government's thought through these changes when they impact on the ground and we see the details of them."

The changes have angered the education industry.

Colleges offering courses for overseas students say they are already doing it tough because of the controversy over violence directed towards Indians.

The chief executive officer of the Australian Council for Private Education and Training, Andrew Smith, says the viability of some institutions may be threatened.

"Our members deliver courses across a whole range of areas ... but we've seen significant drop off in demand for Australian education from overseas over recent months, for a range of reasons, and we expect that this will further dampen that demand and there may well be job losses," he said.

"We've had a global financial crisis. We have had serious reputational damage done to Australia's image overseas.

"So people in the industry will now be very grateful that current students are able to have their arrangements continue, but they will also be very worried about the lack of information about what will happen beyond the release of the skilled occupation list."