European meeting of the international Microsimulation Association, May 17 th , 2012

1. 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

2. 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

3. 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

4. Higher Education Context • 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!!

5. Higher Education Finance Options 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

6. Higher Education Finance Options Graduate Tax: • 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

7. 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 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

8. 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 as birth, marriage, having children and death, education, labour market processes such as employment and unemployment and the simulation of incomes and interactions with the tax/benefit system at the individual level • LIAM is a dynamic (closed) population model

9. 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.

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

11. Methodology • 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 loan

12. Methodology • 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.

13. 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

14. Results: Redistributive nature of IC system

15. Results: Graduate Tax Repaymentsas per cent of Total Simulated Loan Liability

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

17. 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 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.