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Tertiary students who fail more than half their courses may lose their student loans as the Government moves to crack down on abuse.
Only 50% of domestic students who started studying for bachelor's degrees in New Zealand in 2004 finished their degrees within five years - suggesting that up to half of the country's 145,000 bachelor's students will fail or drop out.
Student allowances are chopped if students failed more than half of their courses in the previous year, but there is no requirement to pass courses to keep getting student loans.
New Minister of Tertiary Education Steven Joyce wants to cut the cost of the scheme and use the money to let in some of the thousands of would-be students who are being turned away because courses are full.
Applications have surged throughout the tertiary system because young people have been unable to find jobs in the recession.
Mr Joyce pointed to research showing 41.5% of New Zealand's tertiary education budget went into student loans and allowances, compared with an OECD average of only 17.6%.
He said he wanted to shift funding to pay for more tuition places.
"I'd like to see more money going into actually training EFTSs [equivalent fulltime students] and I'm looking around for opportunities to deliver that in 2011," he said.
"There is also student support.
"We want to make sure that is well-targeted.
"We are not going to change the interest-free loans, but we have to do some work on whether all the money is being spent as well as it should be.
"We have an unusually high level of student support and people are taking advantage of that, so we are looking at ensuring that the student is making academic progress while they are taking up the loans."
Unitec chief executive Rick Ede, who leads a group of six polytechnics across the country's five biggest cities, said the principle of tying student loans to achievement was right, although there was also a risk of "unintended consequences".
Enrolments were uniformly up about 10% this year across his group, but government funding for most institutions had risen much less, so any future applicants would be turned away.
At Auckland University, which has imposed selective entry on all its courses, vice-chancellor Stuart McCutcheon said any money saved from student loans should be ploughed into raising tuition subsidies for each student rather than more places, so the universities could compete with better-funded rivals in Australia.
National student leader David Do said "shifting money around in the same pot" would not help New Zealand catch up with Australia, where the Rudd Government has lifted the overall tertiary education budget.
No comment was available last night from Otago Polytechnic and University of Otago senior officials. - Simon Collins, The New Zealand Herald
Loan under fire
• 179,000 students borrowed under the student loan scheme in 2008.
• Students can borrow to cover their fees plus $160 a week for living costs and $1000 a year for course-related costs.
• The median amount borrowed in 2008 was $6000.
• Only 50% of bachelor's degree students complete their degrees within five years.