The Turnbull government has abandoned plans to allow universities to set their own fees for selected "flagship" courses, but students still face the prospect of increased fees and a lower HECS repayment threshold in next month's budget.

Dumping the flagships proposal, which was spruiked by Prime Minister Malcolm Turnbull during the election campaign, will allow the government to finally kill off the spectre of fee deregulation, which has dogged it since the 2014 budget.

The proposal received almost blanket opposition from university vice-chancellors, who warned it would create a "two-tiered" university system.

The government is also expected to use the May budget to finally dump one of the most notorious "zombie" measures from the Abbott government's first budget: a 20 per cent cut to university course funding.