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)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. Figure 1 Typical Female Age-Earnings Profiles: 2001 0 10 20 30 40 50 60 18202224262830323436384042444648505254 Age Ps/Hr High School Complete University Complete

6. Figure 2 Typical Male Age-Earnings Profiles: 2001 0 10 20 30 40 50 60 70 18202224262830323436384042444648505254 Age Ps/Hr High School Complete University Complete

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

8. Figure 4 Typical 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 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

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 Below $35,000Nil $35,001–$38,9874 $38,988–$42,9724.5 $42,973–$45,2325 $45,233–$48,6215.5 $48,622–$52,6576 $52,658–$55,4296.5 $55,430–$60,9717 $60,972–$64,9997.5 HECS repayment incomes in the range: (A$) per year Per cent of income applied to repayment $65,000 and above8

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 11 Proportion of 18 year olds Undertaking a Degree by Family Wealth 0% 10% 20% 30% 40% 50% 60% 19881998 % Lowest quartileMiddle quartilesTop quartile 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