Over the past 18 months a number of factors have led to a fall in the number of overseas students wanting to study in Australia. And universities, which rely on international student fees after years of government underfunding, are panicking. Education observers around the world are now questioning whether Australia's business model for international education was such a good one after all. Commentators such as Horst Albert Glaser, emeritus professor at Germany's University of Duisburg-Essen, are also questioning the morality of taking fees from foreign students from developing countries in the Asia-Pacific region to prop up Australian universities. But in Australia such issues do not take centre stage. What's brewing here is deep frustration among universities that recent government policy changes are fuelling the drop-off in foreign students. In an attempt to stamp out visa rorting, and weaken the link between immigration and education, the federal government last year introduced more stringent rules governing student visas, and tightened immigration regulations.

That has caused a slowdown in the rate of foreign students starting courses. As the problem worsens there is growing disquiet in Victoria's universities that the honey pot is drying up. The issue is a political hot potato because universities rely on foreign student fees for an average of 16 per cent of their total funding, and use much of that revenue to cross-subsidise domestic students. As Stephen King, dean of the business and economics faculty at Monash, suggested on the website Core Economics recently: ''If you are an undergraduate HECS student and you are sitting next to a foreign fee-paying student, turn to them and say 'thank you'. After all, they are paying for your education.'' He warns: ''If the university sector ends up in financial crisis it is taxpayers who will be bailing them out.'' Melbourne University's higher education expert, Simon Marginson, argues the downturn is primarily due to immigration policy changes, not a fall in demand, though that is also occurring.

''This export industry cannot be expected to grow forever,'' he says, ''and the long-term quality and reputation of Australian international education, including its commercial capacity, depends on the resources we put into it.'' Melbourne University education economist Ross Williams likens the government's strangling of the supply of foreign students to a ''tap being turned off a little''. He predicts the damage to universities will reverberate through the economy, with fewer foreign students affecting property prices (since foreign students form a large part of the rental market) and dampening demand for ancillary services such as cafes around universities. Universities heavily reliant on international students are on shaky ground. Central Queensland University is the most vulnerable as it relies on foreign students for 44 per cent of total revenue. Victorian institutions at risk are Ballarat University (31 per cent), RMIT University (26 per cent) and Swinburne University of Technology (20 per cent). The picture is not much rosier for larger universities such as Monash University (18 per cent), Melbourne University (16 per cent) and La Trobe University (13 per cent).

Monash University is bracing for a 5 per cent fall in foreign student enrolments next year and a 10 per cent drop the year after. Vice-chancellor Ed Byrne says university budgets are feeling the squeeze. ''There's been a systematic underfunding of domestic students, so no Australian university gets enough money from government or fees to pay our costs,'' he says. ''Our costs are dependent on the international markets, so not only do international students bring vast economic earnings to the state, not only do they contribute culturally enormously to our campuses, they also are key factors in university budgets in this country. ''For a state like Victoria, I think this is potentially the most serious economic thing on the horizon.'' International education is Victoria's top export earner, bringing in $5.8 billion last year. At Swinburne University, foreign student numbers are down 10 per cent on last year. Forecasts for next year suggest that will shrink to about 80 per cent of 2009 levels. Vice-chancellor Ian Young believes the government must encourage more international students to come to Australia. ''The real danger in Australia is sending a message out into the market that we're really not interested in having international students come to Australia. So the market is basically voting with their feet and saying if [Australia] doesn't want us, there are other places we can go,'' he says.

Foreign student numbers are reasonably steady at La Trobe University says international director Liz Stinson, but the university is planning for a drop. ''I personally think we have been let down. We have done our darndest to both deliver high-quality education and to obey the law … We've all been working away at this for 10 years and I think there is a collective sense in the industry that we have been let down by government,'' she says. In a sign of growing alarm, the Group of Eight leading universities has warned that a crippling downturn in foreign student numbers would imperil universities. They have called on politicians to take urgent action to pull the international education industry from the brink of potential disaster. They want changes to student visa arrangements to ensure legitimate students are not discouraged from applying to Australia. And they argue that tightening visas to deal with problems in the training sector, particularly so-called dodgy colleges, has resulted in ''collateral damage'' to universities.

John Phillimore from the John Curtin Institute of Public Policy at Curtin University says a slump in foreign student numbers would lead to massive job losses, increased class sizes and fewer courses. Any suggestion that universities are just crying wolf was put to rest in a recent report by Professor Phillimore and fellow Curtin University colleague Paul Koshy, which warns of alarming consequences if the government does not reconsider its policies. In a description of the worst-case scenario - ''the perfect storm'' - they warn that by 2015 foreign student enrolments in higher education could plunge from about 214,000 in 2010 to about 148,000 in 2015, resulting in 36,182 fewer jobs and a collapse of $7 billion in university revenues. Professor Phillimore told The Age the perfect storm scenario was a plausible outcome. In the past 18 months, a cocktail of factors have conspired to put international education under severe pressure. They include a stronger Australian dollar, the impact of the global financial crisis, and fierce competition from countries such as the US. Australia's reputation as a study destination has also taken a hammering, with attacks on foreign students, the collapse of private colleges, the immigration debate during the election campaign and tougher student visa rules.

''The impact of most of these factors has yet to be fully felt,'' the Curtin report warns. However, there are already signs of flattening demand. Government data shows foreign student enrolments in higher education are down 6.3 per cent for the year to June 2010. Enrolments in English language courses are hardest hit, falling more than 20 per cent. Reports from student recruitment agents suggest enrolments could fall by up to 40 per cent. This is alarming for universities as English language courses are a pathway to higher education in subsequent years. Similarly, immigration data shows visas granted to students applying from overseas fell by a staggering 25 per cent in 2009-10. David Buckingham, principal adviser to the office of the vice- chancellor at Monash University, is worried. ''The administrative conditions imposed by the Australian visa system are actually far more onerous than [those that] apply with competitor countries,'' he says. ''It's treating the students and their families almost as if they are money launderers, rather than those who are actually prepared to pay a significant amount in the education of their children.'' Under current visa arrangements, the family of a Chinese student wanting to do an undergraduate course at Monash would need to show it had up to $150,000 in the bank for six months before the date of the visa application, he says.

In comparison, Britain requires students to show a bank deposit of about $40,000 held for 28 days. The US merely asks the student to show adequate funds for self-sufficiency. No one is arguing that we need to go back to days of easy visas, he says, but ''the visa system should be geared to sort the wheat from the chaff''. In the absence of government action, universities such as Melbourne University are doing what they can to prepare for hard times ahead. Deputy vice-chancellor global engagement Sue Elliott says: ''[Considering] the outlook for 2011 and particularly 2012, we are concerned. We are intensifying our engagement with schools, and internationally, but we are also seeking to diversify our student source countries as well.'' RMIT deputy vice-chancellor international Stephen Connelly is also president of the International Education Association of Australia. He wants to see the establishment of a parliamentary secretary for international education.

''What's happening now is a reaction to decisions by government that have been ill informed and poorly implemented with no overarching strategy and no vision. If they got those things right there wouldn't be a problem,'' he says. In response to questions from The Age last week, then immigration minister Chris Evans defended the government's visa changes. He said the government would work collaboratively with the sector to ''ensure these reforms strike the right balance between making the visa application process easier for genuine students, while imposing appropriate checks on those who may seek to abuse the system''. In the Gillard government's new ministerial line-up Chris Bowen takes over as immigration minister while the education portfolio is split, into schools, skills and tertiary education. Chris Evans has the skills and tertiary education portfolio and both ministers can expect intense lobbying by universities. In the meantime, Melbourne University's Professor Marginson, is adamant that Australia would provide a stronger university education to local and international students if the quality of teaching and research could be guaranteed through adequate government funding. It's a view shared by educators who argue foreign students' greatest attribute is not their ability to pay fees. Says Melbourne's Sue Elliott: ''If we were not reliant on international students for income, we would still seek to have international students in our classrooms from across the world … [the true value] is those very important links that are made. Those sorts of connections are priceless.''

Those priceless connections are now at stake as questions about the morality of using developing countries to fund education in Australia loom large. Professor Marginson notes the morality issue is rarely discussed. ''A sign,'' he says, ''of how our one-sided and almost solely commercial approach to international education has emptied out the moral content of our educational relationship with the Asia-Pacific region.''