Group of Eight deputy chief executive Dr Matthew Brown told a parliamentary inquiry hearing on Tuesday, universities had experienced the "destructive influence" of the 2020 Job Ready Graduates package.
Particularly hitting humanities, arts and social sciences students the hardest, he said.
"All around it's been a disaster. We've called from the start ... for it to be removed and replaced," Dr Brown said.
"Now that's no small undertaking to redesign the system to repair what's happened. But it's something that needs to be done nonetheless, and sooner rather than later."
Under the package, funding arrangements were altered in a bid to re-direct students into particular courses by changing fee-contributions.
University and student bodies are also facing questions on plans to pay students almost $320 a week to cover living expenses while they are doing placements in fields such as nursing, social work, midwifery and teaching.
The National Tertiary Education Union said the payments should be extended to all students required to do placements as part of their degree.
In its submission to the inquiry, the union said while it welcomed the reform, many other students are forced to forgo their regular income while undergoing placements.
"If student placement poverty is to be addressed in any substantial form, then the prac payment should be expanded to include all fields of study requiring professional placement," the union said.
"We are also concerned that the rate of payment is not sufficient and that the delay in its introduction is disadvantaging current students."
The Group of Eight, which represents Australia's largest universities, has also expressed concern over the placement payments.
Ahead of the inquiry, the organisation said universities would not be equipped to make the payments to students.
Under the proposed legislation, universities would be required to make the payment for its students, while the Education Department would cover the expense for those doing placements in the selected industries in TAFE courses.
"There has been no explanation as to why a government agency, such as Centrelink or (the Department of Employment) - similar to the arrangement for VET students - cannot administer (placement payments) for students," the Group of Eight said in its submission.
"Further consultation with the sector is needed to ensure that the system is implemented in a way that is efficient, equitable and minimises the administrative load on universities."
The changes were among recommendations in the university accords, a wide-ranging review of the tertiary education sector that was handed down in February.
Laws being examined by the Senate inquiry would also see student debt slashed, with the indexation for HECS now set at the rate of inflation or the wage price index, depending on which is lower.
The indexation changes would lead to $3 billion in debt being wiped, with many students previously having to fork out large amounts in payments following a spike in inflation.
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