A students' union has told MPs that law reforms that would allow the worst student loan defaulters to be arrested at New Zealand's border will miss their target and encourage expats to become permanent "student loan refugees".

The New Zealand University Students' Association (NZUSA) told a select committee considering the reforms that the hardline sanction would be ineffective because less than half of defaulters carried New Zealand passports and the others would not get picked up at the border.

The sanction was one of a series of changes to help claw back around $430 million of defaulted debt, 80 per cent of which is owed by overseas borrowers.

NZUSA executive director Alistair Shaw questioned the efficacy of the arrest measure, saying it would only capture a handful of people and was more likely to deter expats from returning to New Zealand.


Mr Shaw said he had already been contacted by a former student with a loan who did not want to return home for a family wedding because he believed he could be arrested - even though the law had not yet passed.

"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.