Federal Education Minister Christopher Pyne has retreated on his threat to cut 1700 research jobs, announcing the government will split funding for their positions from its plan to deregulate university fees.

In another major backdown, the government is also prepared to sacrifice $1.9 billion in savings by separating a proposed 20 per cent cut to course funding from the bill to deregulate university fees.

The government's higher education package was originally designed to save the budget $4 billion over four years, but if the 20 per cent cut is scrapped it would instead cost an estimated $1.3 billion over the same period.