The Lifecycle Impact of Alternative Higher Education Finance Systems in Ireland
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The Lifecycle Impact of Alternative Higher Education Finance Systems in Ireland Darragh Flannery 1 , Cathal O’Donoghue 2. European meeting of the international Microsimulation Association, May 17 th , 2012 1:University of Limerick

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European meeting of the international microsimulation association may 17 th 2012

The Lifecycle Impact of Alternative Higher Education Finance Systems in IrelandDarragh Flannery1, Cathal O’Donoghue2

European meeting of the international Microsimulation Association,

May 17th, 2012

1:University of Limerick

2: National University of Ireland Galway, Rural Economic Research Centre, IZA


Background and objectives

Background and Objectives

  • Tertiary education in Ireland is heavily reliant on Statesubsidisation with 85% of all expenditure coming frompublic sources in the year 2008 (OECD, 2011)

  • Both a graduate tax scheme and an income contingent loan system have been suggested as possible alternatives to the current free fees scheme

  • The National Strategy for Higher Education to 2030 (2011) recommending that the latter system be introduced in Ireland in the near future


Background and objectives1

Background and Objectives

  • In an international context, empirical work has been carried out most notably for the UK and Australia to gauge redistributive and fiscal implications of introducing such systems using dynamic microsimulation models (LIFEMOD and HARDING)

  • To date, no study has been conducted that attempts to analyse the implications of an alternative higher education finance structure in an Irish context

  • Here we utilize a dynamic microsimulation model for Ireland and explore the fiscal and redistributive implications of a number of alternative higher education finance structures, with varying assumptions regarding the parameters of these systems


European meeting of the international microsimulation association may 17 th 2012

Higher Education Context

• When considering optimal choice of funding (privateversus public) for higher education , the concepts ofefficiency and equity are important

• With regard to efficiency, students derive private benefitfrom education and so should contribute to its cost

• However the state and society also benefit and so shouldcontribute

• Difficult to determine the exact breakdown of who shouldpay what, but the key notion is that students shouldcontribute!!


European meeting of the international microsimulation association may 17 th 2012

Higher Education Finance

Options

Income Contingent Loans:

• Students face no up front fees

• Instead, students generally borrow to cover the cost of theireducation; the loan is then repaid as the individual movesthrough his/her lifecycle with the repayments ending once theloan has been repaid in full or upon retirement

• Repayment generally takes the form of x per cent of theborrower’s future income

• Also, if the individual's income is below a certain threshold,they do not make any repayments

• Any default on debt is met by the taxpayer


European meeting of the international microsimulation association may 17 th 2012

Higher Education Finance Options

Graduate Tax:

• This is similar to an ICL system in that students do notface an upfront charge when they enter higher educationand so the credit constraint is removed; however there isno loan aspect in the design

• Instead, the graduate tax acts as a supplementary

tax/compulsory payment on graduates throughout theirworking life.

• In its simplest form this system may obligate graduates topay a fraction of their taxably income, in addition toincome tax, to the government until they retire

• Some individuals may end up paying more then the costof their education


European meeting of the international microsimulation association may 17 th 2012

Ex-Ante Studies on HigherEducation Finance Systems

• Harding (1995) a dynamic microsimulation model for

Austrialia and predicts that under Australian ICL system80%c of total debt is repaid by graduates by retirement

• Glennerster et al (1995) investigate the impact of an ICLsystem and graduate tax system on the repayment patternsof British graduates using the LIFEMOD micro simulationmodel. They conclude that an ICL system is favorableover the two from an equity standpoint and show thatwomen on average pay back less then men.

• Dearden et al (2007) estimate the impact of the 2004

reforms in UK higher education finance and find positiveredistributional aspects to the changes


European meeting of the international microsimulation association may 17 th 2012

Methodology

• We utilise the LIAM dynamic microsimulation model for Ireland (O’Donoghue et al, 2009)

• Using an ageing module, combined with a collection of

simulated processes, the output of the LIAM model provides asimulated forward life history of all units of the population fromthe Living in Ireland survey data (1994-2001) up to 2050

(discrete time model)

  • • The processes involved include demographic processes such asbirth, marriage, having children and death, education, labourmarket processes such as employment and unemployment andthe simulation of incomes and interactions with the tax/benefitsystem at the individual level

  • LIAM is a dynamic (closed) population model


Methodology

Methodology

  • We first identify those that have tertiary education by the end oftheir 22nd year

  • The simulated population runs form the years 2000 to 2050, thisallows us to track the life cycle of eight cohorts of graduatesuntil their point of retirement.


European meeting of the international microsimulation association may 17 th 2012

Present Value of Total Gross Lifecycle Earnings (€) across Education level and Gender (all in year 2000 values)


European meeting of the international microsimulation association may 17 th 2012

Methodology

• First system simulated is an ICL loan system

• For the purposes of this analysis, our sample were assumedto have completed 4 years of full time tertiary educationbetween the ages of 19 and 22 inclusive, and in the contextof an ICL system, the each received, loans of €2500 perannum (in 2000 prices) during each of those years’ .

• Therefore, each graduate is assumed to incur a debt of

€10000 by the end of his/her stay in higher education. Weassume payment begins as soon as their graduate with nograce period

• We also assume there is a 2% real interest rate on the

loan


European meeting of the international microsimulation association may 17 th 2012

Methodology

• We set the income threshold as the average income of thoseworking for pay in our population for any given year.

• Individuals will pay 10% of any income earned above thisthreshold to service their loan.

• Also, to incorporate more progressivity in the system, we alsoset a second threshold at 1.25 times initial threshold and if anindividual earns more then this they must pay 5% on anyincome earned above this second threshold (as well as 10%on all income above the first)

• We also simulate a graduate tax system through the socialinsurance contributions system, with graduate forced to payan additional 1% on their pay related social insurance (PRSI)contributions until they retire.


European meeting of the international microsimulation association may 17 th 2012

Results: ICL System

% of

Average

Average

Average

Borrowers

Repayment

NPV of

Subsidy

who Repay

Period in

Repayments

as a %

in Full

Years

(€)

of loan

Females

63%

16.2

7,300

27%

Males

85%

15.4

8,976

10.2%

Total

74%

15.7

8,141

18.6%

Average


Results redistributive nature of ic system

Results: Redistributive nature of IC system


Results graduate tax repayments as per cent of total simulated loan liability

Results: Graduate Tax Repaymentsas per cent of Total Simulated LoanLiability


European meeting of the international microsimulation association may 17 th 2012

Results: Redistributive nature ofsimulated GT SystemGraduate Tax revenue as per cent of Total Simulated Loan Liability with 2% Real Interest Rate


European meeting of the international microsimulation association may 17 th 2012

Conclusions

• Simulated ICL suggests a substantial amount of graduate

repay debt in full with men more likely to repay debt in fulland repay quicker

• Simulated CL system exhibits equity in terms of repaymentpatterns

• However, we also see a significant government subsidy

• Simulated graduate tax system within PRSI contributionsseems to hold progressive qualities but entails graduatesrepaying significantly more then the amount theireducation cost them.

• All graduates pay back more under graduate tax schemerelative to the ICL system.


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