Tertiary students who fail more than half their courses may lose their student loans as the Government moves to crack down on abuse.

Only 50 per cent of domestic students who started studying for bachelor's degrees in New Zealand in 2004 finished their degrees within five years - suggesting that up to half of the country's 145,000 bachelor's students will fail or drop out.

Student allowances are chopped if students failed more than half of their courses in the previous year, but there is no requirement to pass courses to keep getting student loans.

New Tertiary Education Minister Steven Joyce wants to cut the cost of the scheme and use the money to let in some of the thousands of would-be students who are being turned away because courses are full.

Applications have surged throughout the tertiary system because young people have been unable to find jobs in the recession.

In the most extreme case, enrolments at Rotorua's Waiariki Institute of Technology have leapt by 37 per cent - from 2400 equivalent fulltime students at this time last year to 3300 when classes started this week.

Waiariki chief executive Pim Borren said hundreds more had been turned away, with 200 on a waiting list for nursing alone.

Mr Joyce pointed to research showing 41.5 per cent of New Zealand's tertiary education budget went into student loans and allowances, compared with an OECD average of only 17.6 per cent.

He told the Weekend Herald he wanted to shift funding to pay for more tuition places. "I'd like to see more money going into actually training EFTSs (equivalent fulltime students) and I'm looking around for opportunities to deliver that in 2011," he said.

"There is also student support. We want to make sure that is well-targeted. We are not going to change the interest-free loans, but we have to do some work on whether all the money is being spent as well as it should be.

"We have an unusually high level of student support and people are taking advantage of that, so we are looking at ensuring that the student is making academic progress while they are taking up the loans."

The move would be welcomed by most tertiary institutions.

Unitec chief executive Rick Ede, who leads a group of six polytechnics across the country's five biggest cities, said the principle of tying student loans to achievement was right, although there was also a risk of "unintended consequences".

Enrolments were uniformly up about 10 per cent this year across his group, but Government funding for most institutions had risen much less so any future applicants would be turned away.

"We [Unitec] have closed off 50 of our 120 courses to further enrolment because they are full," he said.

At Auckland University, which has imposed selective entry on all its courses, vice-chancellor Stuart McCutcheon said any money saved from student loans should be ploughed into raising tuition subsidies for each student rather than more places, so the universities could compete with better-funded rivals in Australia.

But Auckland University of Technology vice-chancellor Derek McCormack warned that cutting loans for failing students might discourage potential students from taking up places that Mr Joyce wants to create.

Education analyst Dave Guerin said tying student loans to academic progress would not free up money for extra places, but would shift funding from students who failed to those who could pass.

National student leader David Do said "shifting money around in the same pot" would not help New Zealand catch up with Australia, where the Rudd Government has lifted the overall tertiary education budget.

* 179,000 students borrowed under the student loan scheme in 2008.
* Students can borrow to cover their fees plus $160 a week for living costs and $1000 a year for course-related costs.
* The median amount borrowed in 2008 was $6000.
* Only 50 per cent of bachelor's degree students complete their degrees within five years.