More than 500,000 people with student loans will face higher repayments, and student allowances will be harder to get under changes to be announced before the May 24 Budget, Prime Minister John Key said yesterday.
More pressure will be placed on borrowers living overseas - who together with domestic borrowers owe about $11 billion - to repay their debts to the Government.
The cost of the means-tested student allowances is $620 million a year.
Mr Key also confirmed there would be greater targeting of assistance to early childhood education to get greater participation by Maori and Pacific Island children.
He said that at the margins some people might be worse off "but it wouldn't be significant - it would be fairly mild".
Savings on the student loans and allowances would be reinvested into improving teaching and research in tertiary institutions, Mr Key said in a pre-Budget speech to Business New Zealand in Wellington.
At present, people with student loans in the workforce must pay 10 per cent on income earned over $19,084 in repayments.
Tertiary Education Minister Steven Joyce would not say whether the threshold would be lowered or the percentage increased but either way repayment will be higher.
He would not spell out just yet the changes proposed to tighten eligibility for student allowances but he indicated in a speech at the weekend he wants to tighten the definition of income, focus student allowances on the first years of tertiary study and on students who could least afford to study.
Under the current rules, students qualify for a full student allowance if their parents' combined income is lower than $55,026. It abates above that up to $83,449.01 for students who live at home, or $90,554.74 for students who do not live at home.
* Students and their partners can earn up to $206.73 a week before tax.
* The average student allowance is about $6000 a year.
* The average amount borrowed in a student loan in 2010 was $7300.
* Interest-free student loans came into effect on April 1, 2006.
Mr Key said he would describe the changes to student loans as modest. "Effectively they will be asked to repay slightly quicker and that will be good news in fact for them because they will be able to pay off their student loan faster. It's good news for the Government because its liability reduces."
Business New Zealand chief executive Phil O'Reilly told Mr Key that business wanted interest-free student loans ditched.
But Mr Key said later too many borrowers had factored in repayments and to apply interest now would have a dramatic impact on the time it took to repay loans.
He said that while any new spending would be funded from savings elsewhere, the health sector would get the biggest increase in the Budget and education would get a sizeable increase.
The final forecasts for the Budget had not yet come through from Treasury, but there was enough headroom to be certain the Government could post a surplus in the 2014-15 year.
"While getting back to surplus by 2014-15 is a challenge, it's an achievable target and it's achievable without any great dramas."
Voters, however, are not as wedded to the surplus target as the Government, according to the latest Herald DigiPoll survey, with 50.6 per cent saying the target date should be pushed out if things got too tough. However, 45.9 per cent thought the Government should keep the plan even if it means things are tight.