Student chiefs fear the airport arrest of a Kiwi over an unpaid loan will create "student loan refugees", and that many New Zealanders living abroad will be "scared to come home".
The New Zealand Union of Students' Associations says the IRD's hardline policy on unpaid student loans was not likely to encourage people to meet their obligations.
Acting president Laura Harris said the arrest of a man over the debt was worrying, adding that she had been contacted by a large number of concerned students and parents.
The defaulter, who had ignored requests to repay his student loan which was now around $130,000 was arrested at the border on Monday while trying to leave the country. He had lived overseas since 2004.
After an initial court appearance, he was bailed to his in-laws' house, and he is due back in court today.
Ms Harris said: "It's really concerning for the large number of these students that want to come home and visit their families and parents, and come to tangis and weddings and funerals. People are going to be scared to come home."
She said that the repayment system was flawed, and should be based on a debtor's income not the amount owed.
"The way that you repay the schemes is based on your student loan and not your income. The system should encourage them to pay loans instead of really harsh penalties."
Ms Harris also said the arrest sends a chilling message.
"We are concerned that this will turn those who are overseas with student loans into permanent refugees, and do little to encourage further compliance with the student loan scheme."
She said there were 130,000 Kiwis overseas with student loans and IRD has previously reported that 70 per cent of them are considered behind in their payments.
"There are clearly issues with the scheme if an overwhelming majority of the participants are non-compliant and the Government needs to look at this before enforcing this draconian measure," she said.
"The right to freedom of movement and to a passport is a fundamental one enshrined in the International Covenant on Human Rights, and should not be broken over a debt - especially given New Zealand effectively abolished imprisonment for debt over 100 years ago."
She said calls had come thick and fast today, with concerns raised from borrowers overseas and their New Zealand-based parents.
"[The arrest] does nothing for either of those concerns. Instead it sends a chilling message that student loan borrowers are cannon-fodder as the Government plays at populist politics."
An IRD spokeswoman said the agency could not respond to specific questions about the case due to privacy laws.
Tertiary Education Minister Steven Joyce said he was also unable to respond to specific questions about the case as it was before the courts.
When asked if the arrest was considered a success for the Government's student loan recovery initiatives, he said:
"Our preference is that people just meet their obligations and that's the important thing because you can't forget that these people have had the benefit of loans from the tax payers to be educated.
"They have made a commitment to pay the money and in some cases, not all cases, they have gone offshore and chosen to forget this."
Arrest was the "last resort", he said.
"If people refuse to do anything there has to be some consequences."
Mr Joyce said there were hardship allowances for people unable to make repayments, but they needed to make contact with IRD to organise such arrangements.
A law change in March 2014 means student loan borrowers who are well behind on repayments and ignore requests from Inland Revenue may have an arrest warrant issued, stopping them from leaving New Zealand until they resolve their arrears.
Inland Revenue has tracked a small number of overseas-based defaulters but, despite the controversial policy generating headlines, until now no arrest warrant has been issued.
An IRD spokesman said its powers to arrest at the border were used as "a very last resort", and followed strenuous efforts to contact the borrower and make repayment arrangements.
Serious defaulters are first contacted to discuss repayment options and are given time to repay some of their loan. Relief from repayments can be granted for hardship reasons, but the man arrested had not made any such application.
An arrest warrant can be issued if a court is satisfied that the person has committed the offence of knowingly avoiding student loan repayment obligations, and is about to leave NZ.
A district court can then make subsequent orders that include paying the amount in default, making arrangements for payment, providing security for the payment, not leaving the country without permission, and surrendering travel documents or tickets.
The option of arrest at the border was modelled on a law that is used to capture people who default on child-support payments. It was designed to target the worst offenders and act as a deterrent to others.
An information-sharing agreement with the Department of Internal Affairs also alerts Inland Revenue when defaulters apply for a New Zealand passport.
According to the latest student loan scheme annual report, produced by the Ministry of Education, the amount repaid directly by overseas-based borrowers was $184.7 million in 2014/15, up from $158.1 million the previous year.
An information-sharing agreement with Australia, expected to start this year, will allow for the exchange of contact details of Kiwi borrowers living in Australia.