"Knowing that there was this arrest at the border ... that was all he was concerned about so he's not going to become compliant."
He added: "The messaging needs to be better, and the sanctions need to be different. The carrot needs to be promoted more than the stick."
The Treasury said it could not predict how many borrowers would be arrested a year, but the number was likely to be small.
Mr Shaw said the hardline measure would do more harm than good.
"It will encourage people to no longer be New Zealanders. There's a real concern that we make the student loan refugee into a permanent status rather than encouraging people to become compliant and meet their obligations."
Government advice also showed a large proportion of overseas borrowers did not carry New Zealand passports - 30 per cent were Australian citizens, 14.5 per cent were Chinese citizens, and many more carried more than one passport.
The NZUSA said this meant a large proportion of defaulting borrowers would not get picked up at the border.
Border arrests were already used to capture people who defaulted on child-support payments. The Treasury said this sanction had been very effective in recouping outstanding child-support money.
After the proposed changes were announced in the Budget in May, hundreds of expat borrowers made contact with the Inland Revenue Department within days.
Government changes in 2010, including more information-sharing between Government departments, have helped cut the cost of lending for student loans from 47c in the dollar to 39c in the dollar in 2013.