I stayed on campus during the my whole time at university. It was probably one of the best experiences that complimented my university life really well. It really depends what you want from university life.

On-campus

There are two main types: Colleges and Residences.

Colleges are normally private institutions affiliated to a university who accept students from a range of universities in the proximity and fully catered.
Residences are usually administered by the university itself and usually un-catered.

Colleges v Residences

In my opinion, residences have a more strict code of conduct as you would expect. They might also have less character than colleges and might even be too clinical and bland because of all the rules and restrictions. Living in residences is a little closer to living off-campus, you will have more freedom to cook, explore and treat it basically like a rented room with facilities.

What to expect?

This all depends on the existing residents there and the “college” culture that is promoted by the leadership (normally volunteer or staff students).

  • If you join a private college or dorm meaning that is not owned or administrated directly by a university (also called affiliated), you can expect some form of hazing.  Here is an article about it, but most of the time it’s all good. again this depends on the culture there.
  • Catered food, most colleges provide all meals and this is a good place to socialise.
  • Sheltered, once you feel comfortable in your college environment, you probably will not explore anything outside of that because there is so much going on on-campus.
  • Meet lots of people from all around Australia and the world.

Pros:

  • Convenience: close to classes, thus saving time and traveling costs (if it’s not there is no point really), no need to cook, you will not even have a kitchen.
  • Socialise: if you do not make friends here, you will never. Just kidding. If you fully participate in events and informal gatherings, there will be always someone around.
  • Cocooned: you have just one bill to worry about, no need to worry about utility bills, rental bonds, incidental repairs. It’s all managed for you.
  • Free tutoring and support: if you surround yourself with good students, you can form study groups and this really helps specially catching up before an exam.
  • Leadership opportunities: there will be plenty of roles to get yourself involved in. If  you miss out, you will be close enough to uni to be fully involved at a uni club, it will be like working from home and you will be supported by your mates at your college.
  • Fast internet and network access as if on-campus (most of the time).

Cons:

  • Distracting, if you mix with the wrong crowd and spend too much time in the common room, you will fail at your studies. Simple.
  • Spoiled kids, if you are unlucky enough, you will have untidy, dirty and inconsiderate neighbours for the whole year.
  • Noise lots of noise, you might get use to it and even miss it when you leave.
  • Share the bathroom and toilet with about 8 other people. Although en-suite rooms are available but cost more.
  • Wait for hours for a turn at the laundry.
  • You might have to vacate during semester break and mid-year break.
  • More expensive if you are considering staying near the city over summer (moving costs, etc).
  • If you have personality clashes with someone, you will have to live with them for a year.

At the end of day, I believe that you should live on campus at least in your first year. If you get sick of it, you can always move out.

Example cost comparison: http://sydney.edu.au/current_students/accommodation/costs_prices/index.shtml
Obviously the costs are biased towards on-campus living but it gives a rough idea.The off campus figures are slightly inflated.