Top university students will be eligible for yearly $3000 scholarships announced in the Budget - but they will have to agree to stay in New Zealand to get the money.
The new scholarship system - designed to help curb the "brain drain" - is part of an extra $57 million the Government is committing over four years to tertiary education.
Overall, the education budget rose from $8 billion to $8.5 billion.
The new scholarships - called bonded merit scholarships - will be given to 500 top students each year, who will get $3000 for up to four years.
After graduation the students will be bonded to work in New Zealand for a period as long as the duration of their scholarship.
The scholarships are an attempt to limit student debt, which is linked to students leaving New Zealand to work in more lucrative jobs overseas.
In March, an Organisation for Economic Co-operation and Development study showed 24.2 per cent of all New Zealand-born people with tertiary education live overseas.
"These students will be the creme de la creme of our academic kids," Education Minister Trevor Mallard said.
"They are people we want to retain, and the fact that [the scholarship] is bonded means we will be able to hold them longer."
University Students' Association co-president Camilla Belich said the scholarships were great for the "lucky" 500 students, but the association would prefer to see the money used for across-the-board fee decreases that benefited all students.
In the past year the Government has been severely criticised for the number of low-quality education courses being offered and stung by controversy surrounding Te Wananga O Aotearoa.
It has also faced problems in the compulsory education sector, in particular last year's scholarship exams and the NCEA system.
The Budget also addressed the compulsory sector, giving an extra $169.1 million over four years.
The money will be used to put 421 new teachers in secondary and area schools and give a $77.8 million increase to schools' operational funding.
The Government's recent agreement with primary school teachers also provides for extra staff to allow teachers to have more non-class time by the end of this year and staffing improvements by 2008.
The Government also committed an extra $11.8 million to the "highly effective schools" strategy, which will now get $28.5 million over the next four years.
The strategy, to start next year, will give funding - equivalent to a 10 per cent increase in a school's operational fund - to top schools, so they can maintain their high standards and share their practices with other schools.
Mr Mallard denied it was similar to the National Party policy of elite "trust schools", saying the schools would not be able to take over weaker schools.
The Budget also gave $152 million over the next four years to the early childhood education sector to help with higher costs providers are facing to employ staff and prevent the costs being passed on to parents.
National education spokesman Bill English said education bureaucracy was the big winner in the Budget as the ministry was getting a bigger funding increase than the country's 2700 schools.
New Zealand First education spokesman Brian Donnelly said all the Budget did was dampen down some education hotspots.