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Many parents working in the region's dairy industry are migrants, and their children make up a significant percentage of rural school rolls.
The proposed changes will limit essential skills visas to one year, and after a maximum of three years, immigrants would have to leave New Zealand for at least 12 months before applying for another work visa.
The changes would also prevent them from sponsoring work visas for partners and student visas for their children, who will have to pay international student fees of $12,000 or more per year.
Immigration Minister Michael Woodhouse said under the present immigration settings, some migrants were spending a number of years in New Zealand on temporary visas and ''end up laying down roots with no pathway to residence, and that is quite unfair on them''.
''The proposed changes to the essential skills visas policy reinforce the temporary nature of these visas and ensure the conditions under which migrants are coming here are clearly understood.''
Balclutha School principal Paddy Ford said there was deep concern among principals in South Otago over the proposed changes.
Many believed it would have a ''detrimental'' effect on school rolls in the area because migrant families would not be able to remain in New Zealand, and it may put many migrant families off coming to New Zealand.
''It's just not viable for them to become foreign fee-paying students,'' Mr Ford said.
''It could affect up to a third or more of the rolls at some of our small schools in South Otago.
''That would certainly cause some schools to start losing staff.''
He said it would also affect children who had finished secondary school because they would not get visas to join the workforce and they would have to pay international fees to go on to tertiary education.
Otago Primary Principals' Association chairwoman Debbie Smith said if the proposed change could affect South Otago, it would affect other rural communities across Otago and New Zealand.
''It's a significant issue for these people and it will affect not only their school but their whole economy and community.
''It has potential to have a major impact. We know that if the roll is lower in a school and there is less staff, and therefore there are issues around employment of staff and teacher aides and resourcing.
''If rolls dropped low enough - and they do - it could shut a school down.
''They've got to be viable.''
She said it was difficult to get workers in rural areas, and the Ministry of Immigration should be encouraging them to come to New Zealand rather than making it harder.
The Catlins Area School principal Kate Staniford was concerned about the future of her community, should the proposal go ahead.
''Although it's not going to affect The Catlins Area School at present, it isn't really supportive of our local community or the future of our school or the future migrant families to this area.
''Cultural diversity is really important to us as a school and to the local industry because we're in a remote area. It's something that we need to preserve.
''I can see the potential future for us is not good if this goes through.''
Schools in North Otago were also concerned about the proposed changes.
Papakaio School principal Gary Shirley said about 15% of his 140 pupils were from migrant families working in North Otago.
However, only about 5% of the pupils would be affected by the proposed changes because most of the families already had permanent residence.
''I see it as being really sad. These students coming in should have every opportunity.
''They're coming to New Zealand because they're leaving a country that doesn't give them an opportunity.
''Surely if they are contributing, by their parents working here for us, then we should do everything we can to give their children an opportunity to thrive in New Zealand.
''Every child has a right to an education. I think we need to uphold that.''
New Zealand Principals' Federation president Whetu Cormick agreed.
''Putting aside the immigration debate, clearly little consideration has been given to the emotional impacts on the children of these people.
''My colleagues tell me the diversity that immigrant families bring has enriched their school communities.
''The needs of these young people, like all New Zealand born young people, should be held at the fore.''
Mr Woodhouse did not comment on the concerns of school principals or the possibility of school rolls being significantly affected by the proposed changes.
The ministry has received about 160 submissions relating to the essential skills visa policy proposals.
The submissions will now be analysed by officials and then presented to Mr Woodhouse for his consideration.
-Additionally reported by Hamish MacLean