Financing Higher Financing Higher Education in the Education in the

Knowledge EconomyKnowledge Economy

Harry Anthony PatrinosHarry Anthony PatrinosWorld BankWorld Bank

Knowledge economy puts premium on learningRequires multi-sector strategyFocus on equityExpand access to learningRaise quality by changing incentivesVariety of financing mechanisms

Learning in the Knowledge Economy

Learning in Knowledge Economy

ThenInformation basedRote learningJust in case Terminal education

NowKnowledge creation/applicationAnalysis and synthesisJust in timeLifelong learning

Learning in Knowledge Economy

ThenInformation basedRote learningJust in case Terminal education

NowKnowledge creation/applicationAnalysis and synthesisJust in timeLifelong learning

Learning in Knowledge Economy

ThenInformation basedRote learningTeacher directedJust in case Formal education onlyDirective based Learn at a given ageTerminal education

NowKnowledge creation/applicationAnalysis and synthesisCollaborative learningJust in timeVariety of learning modes Initiative basedIncentives, motivation to learnLifelong learning

Not Prepared for Knowledge Jobs

0102030405060708090

Sweden OECDaverage

CzechRepublic

Hungary Slovenia Poland Chile

Percent of 16-65 Year Olds Who Test at Low Information Processing Levels (1994-98)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

1970 1980 1990 2000

Rate of Return (%) Years of Schooling

Returns to Year of SchoolingReturns to Year of Schooling

Rising Higher Education ReturnsRising Higher Education Returns

-2

+2

-2.5-2

-1.5-1

-0.50

0.51

1.52

% pointsPrimary

Higher

Source: Psacharopoulos and Patrinos 2004

Financing Learning

• Spending increases, public resources limited• Priority for public: basic education• Balance between subsidies and market

– Benefits both private and public– Access to capital uneven

Variety of Finance Mechanisms

SubsidiesCost-recovery

Entitlements: combination loan/voucher

Tax creditsIncome contingent loans

Savings accountsGraduate tax

Learning accountsHuman capital contracts

VoucherTraditional loan

Examples of Finance Mechanisms

Human Capital Contracts

Australia’s Higher Education Contribution Scheme (HECS)Yale’s Tuition Postponement Option PlanChile’s University Credit Solidarity New Zealand, Ghana, Sweden, UK

Income Contingent loans

Mexico’sTraditional Loan

ExamplesCost Recovery

Examples of Finance Mechanisms

USATax credits

Netherlands, Sweden, Spain, Switzerland, UKLearning Accounts

Brasilia Bolsa EscolaSimilar: US GI Bill

Entitlements

Chile, Guatemala, Holland, SwedenVouchers

ExamplesType of Subsidies

Traditional loan (mortgage-type)• Likely offered only to families who have collateral

• Payment fixed, maturity fixed

• Repayment amount: loan amount

• Subsidy: external

• Risk of returns on investment: only student

Cost Recovery 1

Cost Recovery 2Human capital contracts• Individual commits part of future income

• Payment: percentage of earnings

• Maturity fixed

• Repayment amount: variable

• No subsidy necessary

• Risk of returns on investment: student & investor

Cost Recovery 3Graduate tax• Tax to pay for period or as long as the individual pays taxes

• % of income to pay, political decision rather than market

• Does not create financing alternative for students

• No relation between what paid & cost of higher education

Cost Recovery 4Income contingent loans 1• Payment % of income until loan repaid or maximum period• Maturity: variable (up to a maximum)• Repayment: Lesser of value of %-age of income & loan• Subsidy: external (government, non-profit, etc)• Mutualized premium from high earners covers losses• Risk of returns: student, subsidizing agency, other students

Cost Recovery 5Income contingent loans 2• Payment % Of income until loan repaid or maximum period• Maturity: fixed• Repayment amount: (value of loan) – (amount of periodic

payment below fixed payment value)• Subsidy: external (government, non-profit, etc)• Mutualized high interest rate to cover for lower payments• Risk of returns: student, subsidizing agency, other students

SubsidiesVoucher: government subsidy to students• Fixed-value voucher

• Government fixes value of each voucher

• Student’s family pays for what not covered by voucher

• Voucher acts as discount on tuition fee

• Variable value voucher

• Adjusts effective tuition fee that students pay to quality of school they attend

Subsidies 2

Learning accounts• Encourage savings for education while providing vouchers to

individuals to pursue training

• Individual subsidy, private sector participation

• Amount to which a person is entitled depends on amount saved & kind of training pursued

Subsidies 3

Tax credits

• Taxes reduced in proportion to spending on approved education and training

• Individual responsibility, private sector participation

• Lack of equity, may not be sustainable

Entitlements

• Learners entitled to receive from government an amount to spend on education Combination loan/voucher

• Loans and grants combination• In proportion to wealth and needs• Amount of entitlement, co-finance

amount, repayment terms• Need to market, funds could be

misused

Levin (1983)

Evidence on Finance Mechanisms

• Limited rigorous evidence on impact• Amount of evidence varies by type• More and better evaluations required• Best evaluations involve random assignment

Traditional Loan• Mexico’s Student Loan Program, SOFES

• Impact based on regression discontinuity design

• Results from household survey indicate that financial support has strong positive effect on university enrollment

• SOFES recipients show better academic performance than students without credit

• Caveats: self-selection(Blom et al 2004)

Debt Aversion• 2 recent studies find debt aversion at elite USA

universities• Disutility of carrying debt over & above effects of debt

on lifetime consumption patterns• If student at elite universities in US are already debt

averse, very likely students from poorer social backgrounds are also debt averse

• Presence of debt aversion restricts potential for loans

Mortgage-type Loans

• Most popular student finance scheme• Fixed payment installments• Interest rate typically below rate of private banks• At first sight seems to address capital market failure• Collected by state, private banks, universities• Collection has been poor or costly

– where taxing power of state not used as last resort to collect• In some cases (Philippines) poor collection rates have

caused such schemes to operate at a loss

Income Contingent Loans

• Repayment contingent on pay, as % of earnings after graduation

• Compared with mortgage-type, repayment more evenly spread over graduates’ careers– Investment cost in schooling repaid when returns

materialize

Practical Experience

• Yale Plan (USA), Sweden, South Africa, US, Chile

• More successful: Australia, New Zealand, UK• 2 critical aspects:

1. Taxation system 2. Vast majority of universities are public sector institutions

Chapman (2006)

Still very small, but continuous growth, just financed 1st student in US

Chile, Colombia, Mexico

Continues growing; financed 100s

Germany

Switched to offer student loans instead; 2008 shut down operations

First, USACurrent statusCharacteristicCompany

Human Capital Contracts

Financial Incentives for StudentsRandomized experiment, Canada1. Group offered peer advising & organized study group

services2. Offered substantial merit-scholarships for solid 1st

year grades3. Combined both interventions• Take-up rates much higher for students offered both

services & scholarships than for those offered services alone

• Females used services more than males• No program had effect on grades for males

Scholarships and Grants

• In many countries, tuition fees heavily subsidized & cover only a small part of costs

• Motives can be related to externalities & equity• Increase in tuition of $1,000 translates to

decrease in college enrollment of 1-2 to 4-6 percentage points

Entitlements• USA: GI Bill constitutes a pilot study with vouchers

• Quasi-experimental evidence shows that GI Bill increased educational attainment

Summary and Conclusions

• Instruments aimed at stimulating early learning:

– vouchers, conditional cash transfers & financial incentives

• Financial rewards for students have positive effects

– pupils’ achievement, including low ability students