Innovative Funding for Higher Education


        Policy is easy, its implementations is difficult.

        There is a growing importance of Higher Education around the world. Today higher education is vital for nationís economic growth and also vital for promoting core human values.

        I would like to mention three lessons what we have learnt for economic theories. These are not ideological but rooted largely in the economics of information. While talking about higher education the argument apply equally to whole of tertiary education

A. Lessons from Economic Theories

I.The days of central planning of higher education have gone. Central planning for higher education is no longer feasible. Earlier it was possible when the number of institutions were low. With the explosion of the number of institutions all around the world, with a great increase in the number of students, and a massive increase in the diversity of subject matter, it is certainly too complicated. So there is being a problem in central planning hence it is not desirable. Now economic text book says planning is a good thing. Is it? The theory says competition is a good thing, where you have well informed students. Then I would argue that really we need quality assurance, but subject to that consumers of higher education by and large are how well informed? The model of the well informed consumer applies for higher education, and therefore competition is useful. Hence competition helps students.

II.      Graduates (not Students) should contribute to the cost of their Education. Higher education has social benefits. That means tax payers subsidy can be justified in efficiency growth, but there are also as we know very significant private beneficiaries of individual perseverance of higher education and therefore it is right that they should pay.

III.    There should be a well designed students loans with core characteristics. There are three main characteristics.

  i.      The Income contingent repayments which are calculated in terms of percentage of graduates subsequent earnings, because it increases efficiency to repay and reduces uncertainty. It can be justified in terms of equity, and promote access since it has built-in insurance against inability to pay. Hence itís a genuine loan with least interest;

ii.      The loans provided should ideally be large enough to cover the entire tuition fee and if possible living costs as well; and

iii.      There is an issue of how much interest rate to be charged Ė it shouldnít be Zero interest rate, it shouldnít be the normal interest rate which the banks normally charge, but it should be something like governmentís cost of long term borrowing range.

B.                Lessons learnt from developed countries

i.      Fees: Fees relax the supply side constraints- it brings in more money to increase quantity and improve quality. On the other hand when you bring in more money you should not bring in without any restriction which was done in New Zealand. We need to control the way the fees are introduced. On the other hand the failure to liberalize is also a mistake because it harms quality, access and continues regressivity.

ii.      Studentís support - Lessons about Loans.

a.      Its true that income contingent loans works and they do not harm access for example Ė e.g.( Australia, NZ, UK, Hungary);

b.      Interest subsidies are expensive -donít go there, itís a big mistake Ė e.g (Aus, NZ, UK).

c.      Positive real interest rates are politically feasible (as in Netherlands, Sweden and Hungry); and The design of the studentís loan contract matters because It helps in its implementation.

iii.      Strategy for India

a.      Variable fee structure where the fees varies across the universities. The variable fess structure has double benefit. This brings in more money for the university, and they also increase the strength, competition, and also improve the effectiveness of university in terms of quality. Paradoxically variable fees are fairer than the so called highly subsidized / free higher education. The problem with highly subsidizing higher education is that the tax of the poor people is paid for the middle class students to go up and become rich.

b.      Itís a Student support - in which a good loan scheme is provided so that higher education becomes almost free to the students- (because it is the graduate students who make repayments ); and

c.      Active measurement to promote access. Access can not be promoted by simply subsidizing higher education. Access fails much earlier when students fail to complete secondary education. If you are serious about access then you have to take into account seriously and do things much earlier by improving quality of school education and providing access by adopting many other means at this stage itself.If you adopt this strategy rightly, it becomes a progressive strategy. It is not a pro-market right wing strategy. It is actually a splendidly suggestious leftwing strategy Ė which is genuinely social and progressive.

C.    Implementations

The Problem: Fiscal pressures make loans attractive to Ministries of Finance. Any one can give an amount to the students; the difficulty is in getting it back. Hence measures to be taken

  i.      A country should not embark on a loan scheme without

a.      A reliable method of identifying individuals;

b.      the capacity to maintain records of amounts borrowed, cumulative borrowing & interest charges, and the value of each personís repayments;

c.      the capacity to collect repayments; and

d.      the capacity to track the income of each borrower for income-contingent loans or for deferment of conventional repayments.

ii.      Hence it is important to establish a loan administration. For that you need

a.      enough time for getting from the passage of legislation to the delivery of loans to the first cohort of borrowers;

b.      Strong political sponsorship to make sure that the policy happens as proposed;

c.      Clear ownership, e.g. (the education department.);

d.      Continuing political support (the introduction of a loan system is not an event, but a process);

e.      Enough people with the necessary skills, legislative preparation, IT development, and effective project management

iii.      Running a loan scheme is quite difficult. For students taking loan it is important to:

a.      Ensure their identity reliably;

b.      Provide them with information about their entitlement,

c.      Ensure the size of the loan to which they are entitled, which will require information about what degree, what university, and perhaps their family income;

d.      Ensure that they actually turns up at the relevant university

iv.      While at university, it is necessary to

a.      Establish that one continues its studies; and

b.      Keep track of the dates and amounts of further borrowing

v.      After the student has left university, its necessary to

a.      Track them through changes of identity and address;

b.      Collect repayments, if necessary liaising with the tax authorities;

c.      Collect repayments from people who are outside the country;

d.      Ensure that any concessions on repayment are granted;

e.      Pursue delinquent repayments;

f.        Answer queries;

g.      Record repayments and calculate the outstanding balance, including interest charges;

h.      Keep the borrower notified of the balance of his/her loan; and

i.        Cause the collection of repayments to cease once the loan has been repaid

vi.      What can go wrong?

a.      Papers may be lost;

b.      If itís a electronic system it may crash;

c.      Scanning of details may go wrong, mistakes may happen;

d.      How far the frequency of inquiries are take up and answered etc-etc

vii.      Myth in the Implementation:

a.      It is incorrect to argue that it is easier to collect conventional loan repayments than income-contingent repayments because private lenders require either security for a loan or a guarantee.

b.      Government guarantees are problematical because of Incentive structure inimical to effective collection and of the classification problem.

c.      Mortgage repayments require a capacity to implement an income test.

d.      Its also a myth that pprivate mortgage-type loans work for housing, but are the wrong model for human capital

What I suggest is to have, is a regulated market for Public Institutions and Private institutions set aside a number of seats to be given at fee cap level for which loans are available for e.g.-(50% fee cap and 50% seats free left to the concerned institutions) and Students apply to the institutions and courses of their choice.

Hence there is a continuing important and huge role for the government to provide taxpayer support for higher education, and to regulate the system a fees cap ensuring that there is effective quality assurance. Itís also important to set incentives, e.g. larger subsidies for certain subjects and ensure that there is a good loan scheme.

Lastly need is to adopt and strengthen favourable policies to promote access

This is not a neo-liberal approach. Itís a pro students approach. It will improve Access, Competitiveness, Quality and Effectiveness