Act New Zealand MP Sir Roger Douglas' private member's Bill calling for voluntary student membership passed its first reading 64-58 in Parliament on Wednesday and will now go to a select committee.
"For almost 20 years, no other group of individuals has been forced to join an association - unfortunately, students are the exception," he said.
Students could conscientiously object and leave the union, but their fees were not returned to them.
They were donated to a charity of choice.
Because of this, Sir Roger believed compulsory membership in student associations was a violation of individual freedom of association.
"Many students are forced into students' associations that do not represent their views, waste money on administration costs, and indulge in resource mismanagement for personal gain."
Act on Campus vice-president Peter McCaffrey congratulated Act, National and United Future for supporting the Bill.
"Students don't speak with only one voice, as student associations claim. In fact, students have varying views on all issues, just as the rest of New Zealand does. Forcing students to join an association that claims to represent them only leads to them being misrepresented."
However, Otago Polytechnic Student Association president Meegan Cloughley was "saddened" and "really disappointed" not just because the Bill had passed but because National had supported it.
"National lied. They said last year they would not be changing the status quo," she said.
Most of the association's operational budget, $440,000, was raised from membership fees - about $335,000.
It provided recreational, advocacy and social services for its members which would be put in jeopardy if the Bill was passed.
"It will completely decimate [the association]," she said.
Ms Cloughley was concerned that if institutions gained control of student services, the levies would skyrocket and more pressure would go on staff to provide services which are at present supplied by the association.
She remained hopeful the select committee would be convinced of the "stupidity of full-blown voluntary membership", which severely damaged associations and student services in Australia, and either drop or change the Bill.
Otago University Students Association president Edwin Darlow did not return phone calls yesterday.
University of Otago students approached yesterday largely had no idea they paid a levy, let alone how much it was.
When Heather Osborne (19) was told she paid $175, she thought it was "a bit much to pay" but said it was "cool" an association existed for students.
Isobel Beamish (19) was not bothered about the cost because she did not know about it but said if it did become voluntary she may not pay "because I don't have much to do with them".
Jeff Bednark (24) said it should be voluntary.
He believed his money could be better spent on services he wanted.
• Association revenues
Otago University Students Association
Operational and capital budget (2008): $2.3m
Income from membership levies (2008): $2.29m
Levy per full-time undergraduate student (2009): $175.55
Otago Polytechnic Students Association
Operational budget (2008): $440,000
Income from membership levies (2008): $335,000
Levy per full-time Dunedin student (2009): $170
