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Tertiary students failing more than half their papers may be given a two-year time limit to prove they are worthy of keeping student loans.
Tertiary Minister Steven Joyce has floated plans to make obtaining student loans subject to a student's success, but details of how it would work are yet to be finalised.
Mr Joyce said he was considering making the proposal subject to two years' worth of work.
"For example, if in the first year you miss out on 80% of your courses, then you have a good opportunity to pick that up next year."
If, after the second year, students were still failing, they would lose their right to loans, although there would be no requirement for them to give back what they had already borrowed.
"They just wouldn't be eligible for further loans at that point."
The exact number of passed papers needed to keep the loan had not been decided but Mr Joyce said he was considering somewhere around the 50% mark.
Some universities do not allow students who fail more than a set percentage of their papers to return the following year, so Mr Joyce's policy would not directly affect them.
But it would bar them from moving to a different tertiary provider and having a student loan while they study there.
Mr Joyce said he was still working through figures on how many students would be affected and what savings would be made by cutting loans to those who failed.
It was not the only initiative he was looking at for student loans, he said.
More information would be prepared for the Budget.
He said the proposal - and a plan to cut funding for tertiary providers if their students did not pass - were not about taking money away from education.
"There's not a desire to reduce spending on the students. It's a desire to ensure the spending on the students and the institutions is well targeted and increases the chances of students succeeding."
Mr Joyce said any money saved would be put back into tertiary education, but he would not say where that money would go.
Union of Students Associations co-president David Do said most universities and polytechs prevented students from continuing with their studies if they kept failing papers.
That meant they were not able to keep drawing loans.
"It probably will have very little impact, and we would question what the point of the exercise is," Mr Do said.
Vice-chancellors' committee chairman Derek McCormack said the student loan book was large in terms of its cost.
The fact that there were no interest payments meant it was expensive for the Government to run.
"It's chewing up a lot of the money that would be used otherwise in developing new places and maintaining good levels of quality in the higher education and tertiary sector."