About 40,000 students mistakenly given write-offs in loan interest totalling $136 million will have to repay the money.
Cabinet papers released yesterday also revealed that efforts to work with Australia and Britain on the student debt issue have failed.
Last month Tertiary Education Minister Michael Cullen and Revenue Minister Peter Dunne announced changes to help student loan debtors living overseas start repayments.
Mr Dunne released the Cabinet paper on the changes showing that about 41,000 borrowers incorrectly got $143 million in interest write-offs.
Only borrowers who stay in New Zealand or qualify in other ways for an exemption do not have to pay interest.
The borrowers were in three groups:
* Those identified through the data match. This group was estimated to owe $126 million, or $3700 a borrower, from incorrect write-offs.
* Borrowers identified as non-resident through other means were expected to owe $10 million, or $3300, a borrower.
* Those who already repaid loans owed $7 million, or $1700, a borrower.
The Government decided not to try to get the money back from people who had finished repaying loans.
The paper said the actual increase to debts when the Government sought to recover interest write-offs could be as much as $40 million more once compounded interest was added.
The Ministers expected borrowers to "feel aggrieved" at seeing increases to their loan balances.
"However, we see no reason why such borrowers should keep the interest write-offs they have received."
The paper said it would be unfair to borrowers who made correct repayments if they let the group off.
It was estimated almost 80 per cent of borrowers failed to meet non-resident obligations. The paper said the system was not working and should be changed.
Inland Revenue, from 2000 to 2003, worked on getting a reciprocal agreement with Australia to collect loans. The issue was raised at ministerial levels but did not work because Australia did not require payments from non-resident borrowers.
The Australian Tax Office looked at whether the IRD could pay a fee for it to collect the money but decided the deal would not benefit either country.
A possible reciprocal agreement was put to the UK but British officials said organisational changes there, combined with other priorities, meant there was little or no interest in acting on the issue.
The paper also noted that student loan contracts for 2005 and 2006 missed necessary wording.
Normally interest did not have to be paid once an amount became overdue because it would then be subject to a monthly 2 per cent compounding penalty, but that detail was missing from the documents.
The paper said Studylink would restore the appropriate wording in next year's contract.
It did not say if any borrowers had been hit with the double whammy.
The changes, including an amnesty and repayment holiday for those overseas, were expected to cost $10.3 million more to implement.