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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 17th, 2012
1:University of Limerick
2: National University of Ireland Galway, Rural Economic Research Centre, IZA
• When considering optimal choice of funding (private versus public) for higher education , the concepts of efficiency and equity are important
• With regard to efficiency, students derive private benefit from education and so should contribute to its cost
• However the state and society also benefit and so should contribute
• Difficult to determine the exact breakdown of who should pay what, but the key notion is that students should contribute!!
Income Contingent Loans:
• Students face no up front fees
• Instead, students generally borrow to cover the cost of their education; the loan is then repaid as the individual moves through his/her lifecycle with the repayments ending once the loan has been repaid in full or upon retirement
• Repayment generally takes the form of x per cent of the borrower’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
• This is similar to an ICL system in that students do not face an upfront charge when they enter higher education and so the credit constraint is removed; however there is no 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 to pay a fraction of their taxably income, in addition to income tax, to the government until they retire
• Some individuals may end up paying more then the cost of their education
• 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 ICL system and graduate tax system on the repayment patterns of British graduates using the LIFEMOD micro simulation model. They conclude that an ICL system is favorable over the two from an equity standpoint and show that women 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
• 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)
• First system simulated is an ICL loan system
• For the purposes of this analysis, our sample were assumed to have completed 4 years of full time tertiary education between the ages of 19 and 22 inclusive, and in the context of an ICL system, the each received, loans of €2500 per annum (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
• We set the income threshold as the average income of those working for pay in our population for any given year.
• Individuals will pay 10% of any income earned above this threshold to service their loan.
• Also, to incorporate more progressivity in the system, we also set a second threshold at 1.25 times initial threshold and if an individual earns more then this they must pay 5% on any income earned above this second threshold (as well as 10% on all income above the first)
• We also simulate a graduate tax system through the social insurance contributions system, with graduate forced to pay an additional 1% on their pay related social insurance (PRSI) contributions until they retire.
as a %
Results: Redistributive nature of simulated GT SystemGraduate Tax revenue as per cent of Total Simulated Loan Liability with 2% Real Interest Rate
• 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 repayment patterns
• However, we also see a significant government subsidy
• Simulated graduate tax system within PRSI contributions seems to hold progressive qualities but entails graduates repaying significantly more then the amount their education cost them.
• All graduates pay back more under graduate tax scheme relative to the ICL system.