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Who Deserves Educational Subsidies?

Parental Contributions and Education Savings Plans Alex Usher Educational Policy Institute Accessibility of Higher Education: Challenges for Transitional Economies Moscow , Russian Federation June 29-30 2004. Who Deserves Educational Subsidies?. Three Possible Answers:

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Who Deserves Educational Subsidies?

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  1. Parental Contributions and Education Savings PlansAlex UsherEducational Policy InstituteAccessibility of Higher Education: Challenges for Transitional EconomiesMoscow, Russian FederationJune 29-30 2004 www.educationalpolicy.org

  2. Who Deserves Educational Subsidies? • Three Possible Answers: 1) Everyone equally (Scandinavian model) 2) Future graduates who obtain below-average salaries in the labour market (Australia/UK model – on tuition but not living expenses) 3) Children who come from low-income backgrounds (North American model…also Australia/UK for living expenses) • If answer is no.3 then consideration must be given to parental contributions www.educationalpolicy.org

  3. Comparative Evidence on Parental Contributions www.educationalpolicy.org

  4. Setting Parental Contribution Rates • Need a base income below which no contribution is required • Contribution should rise with marginal income above this amount • Contribution rules should be easily communicable to parents www.educationalpolicy.org

  5. Parental Contributions: a Formula to Avoid Canadian Parental Contribution Formula: (Y-S) * (.45 for 1st $3000) + (.6 for next $3000) + (.75 for all remaining income) Y = Family After-tax Income S = Minimum Standard of Living (varies according to family size and location) www.educationalpolicy.org

  6. Problems with Parental Contributions • Some families will not contribute or save the “expected” amount • There are three ways to deal with this problem: • Deny the student adequate assistance (i.e. punish the student) • Set up an unsubsidized loan system to allow students to borrow what parents did not contribute (i.e. help the student) • Set up measures to encourage parental savings (i.e. help the parent) www.educationalpolicy.org

  7. Why Savings Programs? • Loans are about smoothing consumption forward from the point of purchase • Savings are about smoothing consumption backwards from the point of purchase • Savings are thus a natural complement to loans www.educationalpolicy.org

  8. Rationales for Education Savings Programs • to assist in cost-shifting from state to individuals; • to discourage an over-reliance on borrowing as a means of spreading costs over time; • to help families hedge against future tuition increases; • to help families meet the “expected” contributions of student assistance programs. www.educationalpolicy.org

  9. Other Examples of Government Savings Promotions Governments promote savings for other significant life events: • Pensions • Home Ownership www.educationalpolicy.org

  10. Two Types of Savings Programs • Defined Benefit Programs: • Contributors make specific contributions over a period of time in order to receive a specific, predetermined benefit at the end of the period. • Defined Contribution Programs: • no guaranteed return; the end product is simply the sum of contributions plus interest or gain accruing to the capital over time. www.educationalpolicy.org

  11. Examples of Savings Programs www.educationalpolicy.org

  12. Tools for Promoting Savings 1 - Matching donations to a registered savings program 2 - Providing favourable tax treatment of contributions to a registered savings program 3 - Increasing the rate of return to an investment 4 - Providing favourable tax treatment to the return on investment www.educationalpolicy.org

  13. Savings Promotions Tools www.educationalpolicy.org

  14. Linking Savings and Loans • Bauspar model provides specified loans in return for specified savings over time • Most effective where credit records are weak and value of purchased asset uncertain • Likely most effective in transition economies www.educationalpolicy.org

  15. Problems With Savings Programs • the rich have more disposable income and a greater ability to save than the poor, and hence are likelier to benefit from savings programs • the rich tend to have higher levels of financial literacy than the poor and hence are better able to take advantage of government programs that promote savings www.educationalpolicy.org

  16. Canada Education Savings Grant Expenditures By Income Quartile www.educationalpolicy.org

  17. Canadian Tuition Subsidies by Income Quartile www.educationalpolicy.org

  18. The Balance Sheet on Savings Programs • Evidence shows that savings programs are slightly more regressive than tuition subsidies. • Savings Programs are extremely popular politically. • Savings programs are cheaper than tuition subsidies; if introduced at the same time as cost-sharing measures, it would be a small regressive program replacing a large regressive program. • Provided that cost savings from cost-sharing are re-invested in expanded opportunities and a system of grants for low-income students, the net result should be progressive and result in expanded access to tertiary education. www.educationalpolicy.org

  19. For further information… Alex Usher Educational Policy Institute Toronto Office 1701-77 Bloor st. West Toronto, Ontario (416) 848-0237 ausher@educationalpolicy.org www.educationalpolicy.org

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