The Education Review Office (ERO) says the Ministry of Education needs to create a new model for students who cannot attend mainstream schools.
It says thousands of students, described by the office as excluded, alienated and at-risk, learn through Te Aho o Te Kura Pounamu, formerly the Correspondence School, but are not completing their courses.
ERO says a model designed decades ago for remote rural children is not working.
Central region manager Joyce Gebbie says it's time for the education sector and the Ministry of Education to take responsibility and address the problem of engaging at-risk students.
Ms Gebbie says, historically, the Te Kura learning model was designed for rural children whose parents provided high-quality support, but it doesn't work for many of its present students.