At The Economist’s Higher Education Forum in New York in October I spoke about how higher education can be expanded. I believe that we need a fair and sustainable cost-recovery model at the university level using future earnings to finance current education. This is an issue that generated much attention at the Forum and in subsequent exchanges regarding my blog, which was picked up by The Korea Times in a guest opinion column.
Using future earnings to finance current education – or income contingent loans/repayments – solves many of the equity issues in university finance. No longer would the poor pay for the education of the rich. It also helps generate more resources for education since governments in most countries face difficulty in expanding quality higher education for a growing university population. Tuition without income contingent loans would favor only the rich, and would not produce enough resources for quality and expansion.
Income contingent loans are used in a few countries, including Australia, New Zealand and the United Kingdom. Tuition fees are paid back after graduation based on graduate’s income until the loan is repaid. Professor Nicholas Barr of the London School of Economics explains this very well in a recent interview. Income contingent programs in Australia have helped increase enrollments over time, made higher education more affordable – counter-intuitively by raising tuition – and did not prohibit access for the less wealthy. The program has also helped generate resources for higher education, by tapping future incomes, thus bringing new resources to the sector. The program is efficient, collection is done by the tax authorities, leaving tertiary education institutions the task of education. For more on the effects of such programs see, among others: Chapman 1997; Barr 2004; Barr 2015; Chapman 2006; Chapman and Ryan 2005.
While the demand for higher education is strong and growing, and the returns are high (Psacharopoulos and Patrinos 2004), especially in developing countries (Montenegro and Patrinos 2014), there are still issues to be resolved in terms of getting disadvantaged youth to apply. While the returns are high on average, they are certainly not the same for everyone. This is important to note because while the average university graduate will earn 67% more than the average high school graduate (Oreopoulos and Petronijevic 2013), there is great variation in earnings. For those who attend some college but drop out, earnings differences don’t justify the decision to enroll. There must be better information for such students and greater support networks to help them take on the challenge of college.
The decision to go to college or university is not an easy one; and it is not the same experience for everyone. For example, not everyone is aware of the costs and benefits of attending college. Often, the more disadvantaged underestimate the benefits and/or overestimate the costs. Students from poor families sometimes don’t apply to demanding schools, even if they have the grades, and even if they would receive substantial financing support (Hoxby and Avery 2013). Better information, properly disseminated to the right high school students, would help. Yet, while information on benefits is available – see, for example, PayScale – it is not enough. The decision isn’t simply about going college; you also need to pick the right major – not just the right school. Moreover, in developed countries enrolling is not enough to guarantee a decent future. You must complete your degree to realize the returns to education.
Higher education provides substantial private returns. But is society benefiting? Are students learning anything useful? Those are important questions, and the subjects of future blogs and research on the social returns to education.
Follow Harry Anthony Patrinos on Twitter at @hpatrinos.
Barr, Nicholas. 2004. “Higher Education Funding.” Oxford Review of Economic Policy 20(2): 264-283.
Barr, Nicholas. 2015. “Ensuring Access to University Education without Breaking the Bank.” LSE Research Festival 2015, The London School of Economics and Political Science (http://eprints.lse.ac.uk/62844/).
Chapman, Bruce. 2006. “Income Contingent Loans for Higher Education: International Reforms.” Handbook of the Economics of Education 2: 1435-1503.
Chapman, Bruce. 1997. “Conceptual Issues and the Australian Experience with Income Contingent Charges for Higher Education.” Economic Journal 107(442): 738-751.
Chapman, Bruce, and Chris Ryan. 2005. “The Access Implications of Income-Contingent Charges for Higher Education: Lessons from Australia.” Economics of Education Review 24(5): 491-512.
Hoxby, Caroline, and Christopher Avery. 2013. “The Missing “One-Offs”: The Hidden Supply of High-Achieving, Low-Income Students.” Brookings Papers on Economic Activity 46(1): 1-65.
Montenegro, Claudio E., and Harry A. Patrinos. 2014. “Comparable estimates of returns to schooling around the world.” World Bank Policy Research Working Paper 7020.
Oreopoulos, Philip, and Uros Petronijevic. 2013. “Making college worth it: A review of research on the returns to higher education.” National Bureau of Economic Research No. w19053.
Psacharopoulos, George, and Harry Anthony Patrinos. 2004. “Returns to investment in education: a further update.” Education economics 12(2): 111-134.