The government plans to retain a performance-funding system that docks millions of dollars a year from tertiary institutions.
But Education Minister Chris Hipkins said he would make changes to the system, which takes up to 5 percent of an institution's funding if they do poorly in quality measures including course and qualification completions.
The system has clawed back $17.3 million from the tertiary sector since it was introduced at the end of 2012 and the next deductions will be taken from institutions' December funding payments.
Last year, the commission docked $3.7m from tertiary institutions and in 2015 it deducted $4.1m.
AUT repaid $250,000 last year and its vice-chancellor, Derek McCormack, said the system did not recognise that different institutions enrolled students from different backgrounds.
"They don't really measure educational performance, they measure student success rates and of course there's perverse incentives bound up in that to exclude risky students thereby reducing opportunity in education," he said.
Mr McCormack said the government should dump the system entirely rather than try to improve it.
"All the tweaking in the world isn't going to remove the perverse incentives and the strange under-pinning assumptions - like for example if you have a 100 percent pass rate, is that somewhat better than having 90 percent pass or 86 percent? What's the right number? Where's the educational science that leads you to believe that a certain percentage is correct," he said.
Tertiary Education Commission figures showed most years about half the money repaid to the commission came from polytechnics and institutes of technology.
The Waikato Institute of Technology, Wintec, repaid $324,000 last year.
Its chief executive, Mark Flowers, said the government did need some method of ensuring institutions were doing what they should.
"If you're looking for outcomes and certain outputs as a government that's funding a system there has to be some sort of way of both measuring it and of course not ending up paying for something that you're not getting," he said.
But Mr Flowers said it was not clear if the performance-linked system was helping to raise quality and many people felt ambivalent about it.
Mr Hipkins said there were some problems with the system.
"For example, if somebody starts a programme of study but then gets a job.
"So for example they might start a pre-trade programme then they get an apprenticeship, well the tertiary provider who was doing the pre-trade programme gets a black mark against their name even though that was kind of a successful outcome," he said.