The Government admits changes to post-study work rights for international students could result in a drop of between 1200 and 6000 students, and up to $59 million in revenue each year.
The Government is scrapping employer-assisted work visas, saying the system is too open to exploitation.
Those studying degree-level qualifications will now be offered a three-year open work visa. After that, they can apply for an Essential Skills visa.
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Immigration Minister Iain Lees-Galloway said the pathway from study to residency is clear.
"It's focused on the skills we need to grow our economy," he said. "Those differ at any point in time, but are currently anything to do with building - for example plumbing, gas-fitting or drain-laying."
Sub-degree students in Auckland will be offered a one-year post-study work visa - if they go to the regions they'll get two years.
Mr Lees-Galloway said it will also depend on the vocation, for example, teachers and nurses will be offered two years, wherever they are.
He said New Zealand is a high-quality destination and we will continue to be competitive internationally.
But National says the damage has already been done, with the number of Chinese students coming to New Zealand falling for the first time in five years.
National has welcomed what it calls a backdown from the original changes proposed.
Whitireia and Weltec chief executive Chris Gosling welcomed the changes, saying some students will have fewer work rights, but degree-level students will have more.
He said international students contribute 15 percent of their revenue, with $19 million out of $110 million coming from international students.
Universities New Zealand executive director Chris Whelan said students are now likely to seek higher qualifications.
Asked whether the changes could force some tertiary institutions to close, Mr Galloway said, "we don't want low quality providers in New Zealand".
Newshub.
