The Education ministry has given Higher Education Loans Board (Helb) defaulters 100 per cent waiver on penalties until June 30, 2018.
Education Cabinet Secretary Amina Mohamed announced the waiver on Thursday when she attended the Helb-Employers Forum.
Initially, Helb loan defaulters had been granted 80 per cent waiver and the latest move is aimed at boosting repayments.
However, Ms Mohamed said the amnesty only covers those who will pay their debts in lump sum.
Ms Mohamed asked all university students to acquire smart cards from the lending corporation in order to access loans.
The CS asked all Helb beneficiaries to repay their outstanding loans to enable the board finance other students.
She asked employers to submit deductions to Helb, saying it is not a favour but a legal requirement.
Helb Chief Executive Officer Charles Ringera said 17, 000 defaulters cannot be traced.
Last year, Helb had 85,000 loan defaulters owing Sh9.6 billion.
A total of 169,909 graduates had fully repaid their loans worth Sh13.2 billion by September 2017, while some 136,783 beneficiaries were servicing loans worth Sh20.7 billion.
In 2017, Helb said it had received a surge in notifications from employers indicating retrenchment of their workers resulting in a dip in repayments.
During the forum, Ms Mohamed announced that Helb is set for a name change.
The board will be renamed Tertiary Education Funding Corporation in bid to boost service delivery.
Ms Mohamed urged Helb officials to improve service delivery, saying students and vice chancellors had raised concerns over delay in funds disbursement.
Last year, the Treasury accused Higher Education ministry officials of failing to develop long-term plans for disbursement of student loans, causing funding shortfalls that hurt learners from poor backgrounds.
Most of the students in public universities come from poor backgrounds and require financial assistance.
Meanwhile, the number of students enrolled in universities has grown 56 per cent over the past four years.