Tertiary Education Financing Models Around the World:

Conceptual basis, policy implications and recent international experience

Bruce ChapmanCrawford School of Economics and Government

The Australian National UniversityCanberra ACT 0200

(Bruce.Chapman@anu.edu.au)

Public and Private Mechanisms for Financing Higher Education Santiago, November 24, 2009

OUTLINE

1.- The Shared International Challenge

2.- Costs and Benefits for Students

3.- Loans: The Need for Government Intervention

4.- The Problems with Government Guaranteed Bank Loans

5.- The Costs and Benefits of Income Contingent Loans

6.- An ICL Case Study: Australia`s HECS 1989-2005

7.- The Critical Role of Collection

8.- Changes Internationally Towards ICL

9.- Conclusions

1.- The Shared International Challenge

• unmet demand for places

• inequitable access

• shortage of finances

• an emerging concensus for student contributions

2.- Costs and Benefits for Students

• costs: foregone earnings (+ tuition)

• benefits: additional earnings

• summary: Figures 1 and 2

• costs mean financial assistance is necessary

• net benefits imply the case for a charge

Figure 1Typical Female Age-Earnings Profiles: 2001

0

10

20

30

40

50

60

18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54

Age

Ps/Hr

High School Complete

University Complete

0

10

20

30

40

50

60

18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54

Age

Ps/Hr

High School Complete

University Complete

Figure 2Typical Male Age-Earnings Profiles: 2001

0

10

20

30

40

50

60

70

18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54

Age

Ps/Hr

High School Complete

University Complete

Figure 3 Typical Male Age-Earnings Profiles: The UK 2003

0

2

4

6

8

10

12

14

16

18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Age

Poun

ds/H

r

Bachelor A Level

Figure 4Typical Female Age-Earnings Profiles: The UK 2003

0

2

4

6

8

10

12

14

16

18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Age

Poun

ds/H

r

Bachelor A Level

2.- Costs and Benefits for Students

• costs: foregone earnings (+ tuition)

• benefits: additional earnings

• summary: Figures 1 and 2

• costs mean financial assistance is required

• an implication of the data: high private rates of return to HE

• low tuition charges are socially inequitable

3.- Loans: The Need for Government Intervention

• human capital investment is very uncertain for lenders and for borrowers – completion

• human capital investment is very uncertain for lenders and for borrowers – ability

• human capital investment is very uncertain for lenders and for borrowers – the future labor market

• uncertainty leads to default

• the problem for banks: no saleable collateral

• the problem for students: no access to loans

• government intervention is required

4.- The Problems with Government Guaranteed Bank Loans

• the usual solution: government guaranteed commercial bank loans.

• benefit 1: solves the lender default problem

• benefit 2: provides commercial finance simply

BUT cost 1 - defaults expensive for taxpayers

cost 2 - some hardship when repaying (no consumption smoothing)

cost 3 - some credit risk of default (no insurance)

cost 4 - collection can be administratively expensive

cost 5 - collection can be administratively expensive

5.- The Costs and Benefits of Income Contingent Loans

• describing an unusual but growing solution: income related loans

• benefit 1: avoids repayment hardships (consumption smoothing, see below)

• benefit 2: fixes the student default problem (insurance)

• benefit 3: if universal no family sharing issues

• cost 1: some students avoid payment if don‘t participate

• cost 2: collection requirements can be complex

6.- An ICL Case Study: Australia`s HECS 1989-2005

• HECS charges described: $3,000-$6,000 pa, different by course. A typical debt is $16,000.

• HECS in operation: recording the tuition debt with the Tax Office

• HECS collection parameters: Table 1

• HECS typical repayments: Figures 5 and 6

Table 1HECS Income Thresholds and Repayment Rates: 2004/05

Below $35,000 Nil

$35,001–$38,987 4

$38,988–$42,972 4.5

$42,973–$45,232 5

$45,233–$48,621 5.5

$48,622–$52,657 6

$52,658–$55,429 6.5

$55,430–$60,971 7

$60,972–$64,999 7.5

HECS repayment incomes in the range: (A$) per year

Per cent of income applied to repayment

$65,000 and above 8

$20,000.00

$25,000.00

$30,000.00

$35,000.00

$40,000.00

$45,000.00

$50,000.00

$55,000.00

$60,000.00

20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Age

Dol

lars

Gross Income

After HECS

Figure 5. Typical male repayments: Full time graduates

$20,000.00

$25,000.00

$30,000.00

$35,000.00

$40,000.00

$45,000.00

$50,000.00

$55,000.00

$60,000.00

20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Age

Dol

lars

Gross Income

After HECS

t

Figure 6. Typical female repayments: Full time graduates

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

22 23 24 25 26 27 28 29 30 31 32

AGE

Pe

rce

nta

ge

Figure 7 Bank loan repayments compared to HECS : Full time graduates

Illustrating the benefits of income contingent loans compared to bank loans: consumption

smoothing

• Compare bank loans of same amount with HECS

• Assume graduate is unemployed from age 24 to 27

• Assume graduate is in part-time work from 28 to 32

• Showing consumption smoothing: Figures 6 and 7

$-

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

$3,000.00

$3,500.00

22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Age

Inco

me,

Loa

n P

aym

ents

Bank Payment HECS Payment Male HECS Payment Female

Figure 8 Bank loan repayments compared to HECS :

Unemployed and Part time graduates

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

AGE

Pe

rce

nta

ge

HECS BANK

UnemployedFull Time Full TimePart Time

Figure 9 Bank loan repayments compared to HECS as a proportion of income:

(females, same as males)

• The effect of HECS on revenue:

Figure 10

Actual and Projected HECS Revenue: 1989–2005 (A$)

0

200

400

600

800

1000

1200

1400$m Up Front and Voluntary Repayments

Compulsory Repayments

Total

• The effect of HECS on domestic student numbers: an increase of 55-70 %

• The effect of HECS on access:Figure 11

Proportion of 18 year olds Undertaking a Degree by Family Wealth

0%

10%

20%

30%

40%

50%

60%

1988 1998

% Lowest quartile Middle quartiles Top quartile

Source: Chapman and Ryan (2002).

7.- The Critical Role of Collection

Minimum Requirements in Summary:

• a reliable, preferably universal, system of unique identifiers;

• accurate record-keeping of the liabilities of students (while studying);

• a collection mechanism with a sound and, if possible, a computerised record-keeping system; and

• an efficient way of determining with accuracy, over time, the actual incomes of former students.

8.- Changes Internationally Towards ICL

. Yale (1970s) (failed)

. Sweden (mid-1980s) (blunt form)

. Australia (1989) (first to use tax office)

. New Zealand (1992)

. the US (1994, modified 2007)

. South Africa (1994)

. the UK (1997, expanded considerably in 2006)

. Thailand, 2007 (only)

. Hungary, 2003

. Canada (?), 2009

. Malaysia, 2010

. Ireland, 2010

. Under consideration in many other countries: Germany, Colombia, EU, Israel, PNG

9.- Conclusions• the economically and socially advantaged derive large benefits

from higher education

• thus, charging low or no tuition is socially inequitable

• tuition revenue can provide extra finances for higher education efficiency and growth (or assisting other areas of education)

• Intervention is needed, but there are important problems with bank loans

• ICL provide an equitable system: only pay when you are able

• thus ICL provides default insurance and consumption smoothing

• ICL can be used for income support as well as tuition

• many countries currently have adopted or are adopting ICL, but not all

BUT: the collection mechanism of ICL is critical to success and these approaches cannot be used in many countries

Thank you