Tertiary Education Financing Models Around the World:

1. Tertiary Education Financing Models Around the World: Conceptual basis, policy implications and recent international experience Bruce Chapman Crawford School of Economics and Government The Australian National University Canberra ACT 0200(Bruce.Chapman@anu.edu.au) Public and Private Mechanisms for Financing Higher Education Santiago, November 24, 2009

2. 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

3. 1.- The Shared International Challenge • unmet demand for places • inequitable access • shortage of finances • an emerging concensus for student contributions

4. 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

5. Ps/Hr 60 High School Complete 50 University Complete 40 30 20 10 Age 0 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 Figure 1 Typical Female Age-Earnings Profiles: 2001

6. Ps/Hr 70 High School Complete 60 University Complete 50 40 30 20 10 Age 0 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 Figure 2 Typical Male Age-Earnings Profiles: 2001

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

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

9. 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

10. 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

11. 4.- The Problems withGovernment 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

12. 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

13. 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

14. Table 1 HECS Income Thresholds and Repayment Rates: 2004/05 HECS repayment incomes in the range: (A$) per year Per cent of income applied to repayment 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 $65,000 and above 8

15. Figure 5. Typical male repayments: Full time graduates

16. Figure 6. Typical female repayments: Full time graduates

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

18. 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

19. Figure 8 Bank loan repayments compared to HECS : Unemployed and Part time graduates

20. Figure 9 Bank loan repayments compared to HECS as a proportion of income: (females, same as males)

21. The effect of HECS on revenue: • Figure 10 • Actual and Projected HECS Revenue: 1989–2005 (A$) • The effect of HECS on domestic student numbers: • an increase of 55-70 %

22. The effect of HECS on access: • Figure 11Proportion of 18 year olds Undertaking a Degree by Family Wealth Lowest quartile Middle quartiles Top quartile % 60% 50% 40% 30% 20% 10% 0% 1988 1998 Source: Chapman and Ryan (2002).

23. 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.

24. 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

25. 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

26. Thank you