UNIVERSITIES have relied too heavily on overseas students to compensate for scant public funding, a Federal Government-commissioned review of higher education has found.

Overseas students, who make up a quarter of all tertiary students in Australia, are cash cows that bolster budgets for domestic students and research, the review headed by Professor Denise Bradley finds. But the income is volatile - subject to economic upheavals and political unrest in their countries of origin.

"There appears to be a systematic pattern across institutions of cross-subsidisation to supplement other institutional activities," the report says. "This suggests that funds available for teaching of domestic students and for research activities may be insufficient and that services for international students would improve if more funds were made available to institutions."

But as standards of education improve overseas, particularly in the Asia Pacific, the appeal of studying Down Under could dim.

The Bradley report cites one overseas student placement service, IDP Education, that projected demand for positions at Australian universities would grow by 4.25 per cent a year to 2010, slow to 3 per cent a year to 2015, and further beyond that. The projections did not take the financial crisis into account.

In Sydney, the proportion of income from overseas students is highest at Macquarie University and the University of Technology, Sydney. Both rely more heavily on the students than the average Australian university, which collects 15 per cent of revenue from foreign students.

The report warns against too heavy a reliance on foreign students and calls for international scholarships to relieve the skills shortage. It recommends 1000 scholarships for foreign students, with government funding to be matched by institutions.

"Despite the focus on the knowledge economy and forecast shortages of highly skilled workers in Australia, research higher degree students have been given a relatively low priority."

It also says an independent board should sell Australian study overseas.