Full-time domestic students could face a 65% increase in student services levies and a 3% to 4% increase in tuition fees, adding probably $350 to $500 to their annual bill.
An increase in fees and built-in service levies for international students has already been approved.
On Monday, the polytechnic council approved in principle increasing the annual domestic student services levy by $150 to $380.
It also approved chief executive Phil Ker budgeting for domestic tuition-fee increases up to the maximum 4% allowed.
Mr Ker said yesterday he would be preparing the budget over the next two months and no final decisions had been made yet.
But he said even though he knew increasing fees and levies would be controversial, some level of increase was inevitable.
The polytechnic needed to cut $2.9 million from its budget next year because its base government funding was reducing by that amount.
The only way to balance its books was by increasing revenue and cutting costs.
"We are between a rock and a hard place, as is everyone else in the tertiary sector."
The increased service levy was expected to bring in about $470,000, he said.
The increase in domestic tuition fees, plus the increase in international tuition fees already approved, could increase income by about $500,000 next year, to more than $15 million.
The polytechnic had been "continually cutting costs" for the past six years and costs were under scrutiny again.
Many "positive workstreams" were being examined in an attempt to improve the budget by $2.9 million and avoid redundancies, he said.
Possibilities included sub-tenanting or mothballing some leased spaces, improving work practices and not replacing some staff who left.
However, "absolutely unavoidable cost increases" budgeted for next year included $200,000 for increased fuel and gas prices from the emissions trading scheme.
The polytechnic has about 3000 fully-funded domestic students and has asked the Tertiary Education Commission to fund an additional 200 domestic student places next year from the money announced in this year's Budget to help meet roll-growth demand.
The funding would mitigate the impact of base funding cuts and would probably mean domestic tuition-fee increases would be closer to 3% than 4%, Mr Ker said.
He said he "did not want to think about" what would happen if the budget reduction target was not met.
The polytechnic last had a series of restructurings and redundancies in 2008.
Otago Polytechnic Students' Association president Meegan Cloughley said an extra $500 a year in fees and levies would be seen by many students as "an excessive amount".
However, Ms Cloughley, who until April sat on the polytechnic council, said she understood the polytechnic's funding dilemma because of government underfunding.
She looked forward to discussing options with Mr Ker, saying it might be possible to introduce more of a "user-pays" system, to ensure those who did not use particular services did not have to pay for them.
In November, the University of Otago council approved a $45 increase in the welfare and recreation levy applied to Dunedin campus students for 2010, taking the levy to $284, and introduced a new capital development levy of $50 per Dunedin campus student.
The levies were expected to bring in about $6.2 million this year.
