320 likes | 338 Views
Higher Education Funding. Haroon Chowdry Institute for Fiscal Studies 8 December 2008. Outline of lecture. Reasons for state intervention in HE Overview of HE funding and reforms Financial impact of reforms on students and graduates Progressivity of HE reforms and potential alternatives
E N D
Higher Education Funding Haroon Chowdry Institute for Fiscal Studies 8 December 2008
Outline of lecture • Reasons for state intervention in HE • Overview of HE funding and reforms • Financial impact of reforms on students and graduates • Progressivity of HE reforms and potential alternatives • Potential implications for access to HE • Future plans
Why might the market alone lead to inefficient outcomes? • Credit market failure • Risk and uncertainty • Externalities • Information problems
1. Credit market failure • HE requires cash for fees and living expenses • With perfect credit markets, borrow now and repay for future income • But credit markets are not perfect • Lack of collateral to secure debt against • Asymmetric information: borrower has more information than lender • Lender exposed to adverse selection / moral hazard • Higher interest rates or credit rationing • Inefficiently small amount of borrowing and investment
2. Risk and uncertainty • Student may be reluctant to borrow • Debt aversion • Perceived risk of failing the degree • Uncertain returns to a degree: positive on average but high variance
3. Externalities • Education may create benefits to society over and above those that accrue to the individual • Total return to education = private return + social return • Average private return to HE vs. non-HE is roughly 25–27% for women, 18–21% for men • Social returns difficult to quantify • Do individuals incorporate socialreturn to education in weighing up costs and benefits?
4. Information problems • To make rational decisions, individuals must be perfectly informed about • Nature of product (e.g. university quality, HE experience) • Prices (e.g. fees, living costs, foregone earnings) • Future (e.g. earnings, debt repayments) • Imperfect information may lead to under-consumption • Particularly among lower socio-economic groups
Efficiency • These arguments can justify state intervention and subsidies on efficiency grounds • But do not justify full subsidy given large private returns to HE
Recent history • No tuition fees prior to 1998 • Living costs financed by grants and parental contribution, mortgage-type loans after 1990 • 1997 Dearing Report • Up-front tuition fee of £1,000, exemptions for poorer students • Income-contingent loans replaced grants • 2004 Higher Education Act • Deferred fees (currently £3,145), no exemptions • Grants and bursaries for poorer students • Debt write-off after 25 years
Implications for students • Government wants more people to go to HE, not fewer • Target of 50% participation rate by 2010 • Surely increasing fees prices students out of HE? • Not as contradictory as it seems • New grants and bursaries designed to help credit constraints for poorest • Risk insured by income contingency and debt write-off • On basis of cost-benefit analysis, poorest would be more likely to go
Non-London student finances under old system with up-front fees of £1,100 p.a.
Non-London student finances under new system with deferred fees of £3,000 p.a.
Implications for graduates (1) • Graduates will enter labour market with debts to government in the region of £20,000 • Nearly twice as much as under old system • Effects of reforms on graduates vary according to lifetime earnings and employment patterns • Income-contingency of repayments and debt write-off after 25 years • Requires a full distributional analysis of graduate lifetime income
Implications for graduates (2) General observations: • All graduates benefit from interest subsidy and raising of repayment threshold • Graduates with lower lifetime earnings receive higher subsidy • Interest subsidy is more valuable the longer it takes to repay the loan • Low-earning graduates more likely to benefit from debt write-off
How much do different graduates pay back? Amount borrowed: £18,290 (2006/07 prices)
Implications for graduates (3) • Must also take into account private debt • Attracts higher interest than government debt • Assume shortfall financed entirely by private debt • Lower shortfall for poor students means they pay back less overall than under old system • Most students from richer backgrounds would pay back more
Top-up fees vs. alternatives • Raising money on its own does not justify higher fees – there are other options • Examples proposed in run-up to 2005 election: scrap fees and raise funding for universities through • scrapping maintenance loan subsidies (Conservatives) • higher rate tax rise (Liberal Democrats) • Different policies shift balance of funding between public and individual contributions to HE in different ways
Top-up fees vs. alternatives • How do the costs incurred by paying for the additional university funding vary across income distribution? • What is distributional impact of different revenue-raising strategies? • Raising money through deferred fees is more ‘progressive’ than raising the equivalent amount through some alternatives such as • Direct taxation • Indirect taxation
Costs borne across the income distribution to raise same amount of money as top-up fees(ILLUSTRATIVE ONLY)
Access to HE (1) • Major concern that top-up fees would discourage HE entry from poorer pupils • One aim of reforms was to widen access • Poorer students actually better off in cash terms • Well known that students from low-income backgrounds under-represented in university • Even more so in top universities • How likely are changes to student finance to encourage/discourage entry?
Poorer students are overall less likely to go university than richer students…
… But those with comparable A Level grades to richer students are not 25% of richest get top A levels 3% of poorest get top A levels 84% of poorest 45% of richest
Access to HE (2) • Most important determinant of HE attendance is having good A-Level grades • Conditional on this, relationship between income and HE participation is weak • Best way to widen access is to improve A-Level grades of disadvantaged pupils • Limited scope for tuition policy here • Resources/interventions would be better targeted earlier in life
Future plans • HE funding review expected in late 2009 • May explore further policy changes • Remove fee cap? • Resources • Competition • Remove interest subsidy? • Actually a ‘progressive’ measure
Conclusions (1) • Many economic reasons for state intervention in provision of HE • HE Act addresses borrowing constraints and risk • Student support package and repayment system are highly progressive • Low-earning graduates benefit most from loan subsidies and pay back less than: • High-earning graduates • Low-earning graduates under old system
Conclusions (2) • But may not be most effective way to get more disadvantaged students into HE • Barriers to entry for poor students occur earlier in life • Stay tuned for further developments!