The government was warned schools could face empty classrooms if large numbers of students transferred to online schools.
The Education (Update) Amendment Bill has proposed allowing schools, tertiary institutions and private companies to set up online schools offering anything from one subject to a full curriculum.
Documents obtained by the Post Primary Teachers Association show the Education Ministry told the government this year that the schools could lead to a significant increase in correspondence enrolments.
It said the existing distance education school, Te Kura (the Correspondence School), could lose enrolments and perhaps suffer a mass exodus of students.
It said the best results appeared to come from blended learning, where online and face-to-face teaching was mixed.
The ministry initially recommended online schools be required to employ registered teachers.
It later said that would only apply to regular schools with online operations. The Education Minister could decide the number of registered teachers required by online schools run by private entities or tertiary institutions, it said.
It said the government should fully fund full-time enrolments in the schools, but students could pay for one or two subjects on top of a full-time education.
The ministry said the Education Minister could set restrictive requirements on the first online schools.
A June document referred to POLs (Providers of Online Learning). But in July the documents called them COOLs (Communities of Online Learning).
The documents raised concerns about students failing in online schools. It suggested ways to avoid that happening.
Post Primary Teachers Association president Angela Roberts said the government should remove the schools from the Education Act update.
She said the union supported distance education, but the bill would encourage "wild west" competition.
"This does nothing to support the substantial online system that we have across the country at the moment.
"It just cashes up our education system for private providers," she said.
Ms Roberts said the documents showed the government had thought about online schools for some time. It should have consulted with education sector groups, she said.
Principals Federation president Iain Taylor said online schools could harm enrolments, especially in small, rural schools.
Education Minister Hekia Parata said the online schools would provide more choices for students.
"They will not replace schools, they will supplement and complement them," she said.
"Many students who learn online will do so where a particular subject, like Mandarin, or Te Reo Māori, are not available at their local school, or where they wish to take more advanced studies in subjects like chemistry."
Ms Parata said most students would not undertake full-time online learning. However, it might be the best option for some who were disengaged from school, home-schooled, or living in isolated areas.
She said the schools might also cater for gifted students, those who were itinerant or of ill-health and those who lived overseas, but wanted New Zealand qualifications.
Ms Parata said Communities of Online Learning providers would face a rigourous accreditation process and ongoing monitoring.