The federal government will cut university funding through a two-year efficiency dividend and an increase in students’ fees in a $2.8bn hit on the sector, the education minister, Simon Birmingham, revealed on Monday night.

In its 9 May budget the government will also lower the repayment threshold for student loans from $55,000 to $42,000.

Birmingham told an event co-hosted by the Australian Industry Group and Universities Australia in Canberra that the package was “fair, reasonable and necessary” to make the government contribution to the sector sustainable.

As anticipated by the tertiary education sector, the federal government has dropped plans to cut university funding by 20%, replacing it with a 2.5% efficiency dividend on commonwealth grant scheme payments in both 2018 and 2019.

Birmingham said the government would lift the average student share of fees from 42% to 46%, with the taxpayers’ share falling from 58% to 54%. The fee increases will be 1.8% each year starting in 2018 and totalling a 7.5% increase by 2021.

“When considered against total commonwealth government payments of $74bn to universities over the next four years, the impact of this $2.8bn reform package is less than 4% of the revenues to universities from taxpayers and students,” Birmingham said.

Defending the cut, he cited a report by Deloitte Access Economics that found that between 2010 and 2015 the average cost of delivery per student increased by 9.5%, while per student funding grew by 15%.

In comments rebutting Labor’s claims of “$100,000 degrees”, Birmingham said the most any student would pay for a four-year commonwealth-supported course would be $50,000.

“The most expensive course – a six-year medical degree that brings substantial private benefits – will result in maximum student fees of $75,000, while taxpayers will pay $137,300 in fees.”

Fee increases for a four-year course would “range from $2,000 to, at most, $3,600”, he said.

Birmingham also promised that “no student will pay a cent upfront for their higher education” due to the Help loan scheme.

The threshold for repaying student loans will be reduced from $55,000 to $42,000 from July 2018, with a repayment rate of 1% at an income of $42,000 and rising to a maximum new threshold of $119,882 with a repayment rate of 10%. Thresholds will now be indexed to the consumer price index, not average weekly earnings.

Birmingham said that the new threshold was 20% above the full-time minimum wage, and a worker earning $42,000 would pay back $8 a week for the student loan that funded their degree.

Birmingham said that the $592m Higher Education Participation and Partnership Program would be retained and embedded in legislation as a per student equity loading to drive engagement, retention and outcomes for students from lower socioeconomic and Indigenous backgrounds.

The scheme will consist of a $985 indexed loading for each eligible student and performance funding based on increased success rates of those students.

In other elements of the package the government will:

Restrict subsidies to Australian citizens only and certain special visa category permanent residents from New Zealand and humanitarian refugees

Make 7.5% of universities’ funding from the commonwealth grant scheme contingent on performance requirements for admissions and financial transparency from 2019

Allow universities to enrol students in demand-driven commonwealth-supported place for sub-bachelor level diplomas, advanced diplomas and associate degree courses

Spend $37m on postgraduate scholarships

Spend $15m over four years to set up eight community-owned, regional study hubs to support regional students to study courses in their own towns by distance from any participating Australian university

Last week Universities Australia warned against budget cuts, releasing an analysis that shows almost $4bn has been cut from the sector and its students since 2011.

The Universities Australia chief executive, Belinda Robinson, said universities and their students “have already done more than their fair share of budget repair”.

“It is difficult to justify further cuts that would affect student affordability and put at risk the quality of education and research on which Australia’s prosperity depends.”