Contracts with debt collection agents ARL Collect, Milton Graham and Probe Operations are due to expire at the end of the financial year and will not be renewed.
NDIS Minister Bill Shorten said the move was to ensure the illegal robodebt collection scheme never happened again.
The scheme ran from 2015 to 2019 and used annual tax office data to calculate average fortnightly earnings and automatically issue debt notices.
Collection agencies pursued welfare recipients for debts they did not owe, and a royal commission into the scheme heard accounts of "pushy" practices designed to get robodebt victims to pay up.
Mr Shorten said the government had to consider the people affected by such collection practices.
"It's often very vulnerable Australians, people who have gotten on government payments in the first place because they are at a vulnerable time in their lives," he said.
"We have to stop giving their information to private companies and ensure the debt recovery process is lawful, fair and transparent."
The Australian Council of Social Services said the change indicated an important new era of putting people at the centre of Services Australia.
The welfare advocacy organisation said robodebt hit people when they were going through the hardest of times, and the government must eliminate any possibility of it happening again.
Mr Shorten said while there would be "opportunistic behaviour" from people trying to scam government payments, Services Australia was capable of recovering debts.
He said in-house collection agents would help people owing money through a transition process.
"Government should never start from the position that the existence of an alleged debt means the citizen is guilty until proven innocent," Mr Shorten said.
"Flexible repayment options, short-term counselling, information and referrals to support systems may be provided."
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