Is free higher education fair?

by Andreas Schleicher 

Director, Directorate for Education and Skills 

Skills have become the currency of 21st century economies and, despite the significant increase the UK has seen in university graduation over the last decade, the earnings of workers with a Master’s degree remain over 80% higher than those of workers with just five good GCSEs or an equivalent vocational qualification. Sure, not every university graduate will end up with a great salary, but the claim that for many studying does not pay is a myth: just one in 10 university graduates earn less than half the median salary, a figure which is double for adults with only five good GCSEs, and another 22% of graduates earn between half the median and the median salary. Conversely, 21% earn more than twice the median, three times more than those with five good GCESs. Beyond the monetary benefits, higher education brings important social benefits for individuals and nations, ranging from better health through to greater social participation, and up to more trust in people and institutions.

Some say these trends are all futures of the past, and that the job prospects of future graduates may look much worse, particularly if bringing in more and more people eventually means including less qualified applicants. But people have been saying these things ever since I began tracking those numbers over a decade ago, and the bottom line is that, so far, the rise in knowledge workers has generally not led to a decline in their pay, as we have seen for people at the lower end of the skills spectrum.

That brings up the question of who should pay for this, because there simply is no free university education.

The Nordic countries in Europe pay for universities through the public purse and some even generously subsidise the living costs of university students. It makes sense for them because participation is almost universal and they have a steeply progressive tax system so that they can recuperate the funds from graduates who typically end up as the better earners.

European countries like France or Germany, too, say higher education is important, but their governments are neither willing to put in the required funds nor allowing most of their universities to charge tuition. They end up compromising quality and limiting provision, with the effect that all workers end up paying for the university education of the rich parents’ children. That is, because wherever access is limited, it tends to be the wealthiest and not the smartest students who get the best places, whatever the source of funds.

The third alternative is to allow universities to charge tuition, and interestingly, OECD data show absolutely no cross-country relationship between the level of tuition fees countries charge and the participation of disadvantaged youth in tertiary education. In fact, social mobility is worse in Germany, which pays for all almost university education through the public purse, than it is in the UK. That is because to mobilise those public funds for higher education, Germany ends up charging tuition for children in kindergarten, which leads to a much less level playing field from the start.

But getting tuition right is not simple either. If countries put the burden for tuition entirely on the shoulders of families, they risk not attracting the brightest but instead the wealthiest children to attend, which means not making the most out of the country’s talent.

If countries rely mainly on commercial loans which students have to repay once they finish their studies, they still leave students and families with the risk, because the promise of greater lifetime earnings of graduates is a statistical one, and there is actually very wide dispersion in earnings. The UK, and some other countries too, have tried to square that circle with a combination of income-contingent loans and means-tested grants. That basically means risk-free access to financing for prospective students with governments leveraging, but not paying, for the costs.

The loans reduce the liquidity constraints faced by individuals at the time of study, while the income-contingent nature of the loans system addresses the risk and uncertainty faced by individuals (insurance against inability to repay) and improves the progressiveness of the overall system (lower public subsidy for graduates with higher private returns). In the UK, the repayments of graduates correspond to a proportion of their earnings and low earners make low or no repayments, and graduates with low lifetime earnings end up not repaying their loans in full.

But even the best loan system is often not sufficient. There is ample evidence that young people from low income families or from families with poorly educated parents (but also youth who just don't have good information on the benefits of tertiary education) underestimate the net benefits of tertiary education. That’s why it has paid off for the UK to complement the loan scheme with means-tested grants or tuition waivers for vulnerable groups. It will be worth it to continue to do so, simply because people with better education will pay much more in taxes than what their education costs.

Sure, those loan and grant systems cost money, and have shifted risks to government which will end up paying for any bad debt. Indeed, it is very likely that repayment rates will end up a lot lower compared to what the Government anticipated in 2012. But these costs are just a tiny fraction of the added fiscal income due to better educated individuals paying higher taxes, let alone the social benefits. Keep in mind that the added tax income of those graduates who end up in employment, on average over £80 000 in the UK, is many times larger than any conceivable bad debt. And where students don’t pay their loans back, tuition will still have had important effects in terms of having students choose their studies carefully and complete them on time, something where the UK does so much better than most other European countries.

Every year I am reading media stories that the financial burden on students, perceived or real, is choking off entry into higher education. But every year our statistics show a rise in entry to higher education. It’s also noteworthy that the UK ranks second after New Zealand when it comes to the share of international students, which is another indicator of the attractiveness of UK higher education.

Still, there is a lot the UK can do to further improve its approach to financing universities. For a start, it can do better with aligning course offerings with societal demand. That may also mean thinking more carefully about fee structures, ensuring that these better reflect the cost of provision and the value to students. Indeed, it is crucial to ensure that fees reflect the educational value of the programmes for students, rather than the amounts that universities can extract from students simply because graduates can expect higher lifetime earnings that also reflect their prior attainment.

Consider that England currently has an above-average share of low-skilled 20-34 year-old graduates, but an above-average share of tertiary graduates. Any increases in tuition fees must therefore demonstrably go into better teaching and learning. The Framework of Excellence makes a start to address this, but it does not yet adequately capture the most important element in this regard: the value that universities add to student learning outcomes.

I also worry that the loan repayment parameters mean that many middle income workers – such as teachers, health professionals, public sector workers – will end up paying more for their education than better earners such as lawyers and bankers. Not least, it needs to be kept in mind that many UK students are likely to have some level of debt for up to 30 years and some research on the broader implications of student debt would be important. Contrast this with Australian students who pay off the loan for their undergraduate degree within nine years of graduation.

That being said, among all available approaches, a system of income-contingent loans and means-tested grants is still the most scalable and sustainable approach to university finance. From a public policy point of view, governments should invest public resources in education over the lifetime of a young person in those stages where its impact is greatest, both in terms of efficiency and equity. Higher education is not high on that list.

Links 
Education at a Glance 2017: How much do tertiary students pay and what public support do they receive?
Enhancing higher education system performance: Benchmarking higher education system performance

Follow the conversation on Twitter: #OECDEAG

Image source: @Shutterstock

Who benefits when international students pay higher tuition fees?

by Dirk Van Damme

Head of the Innovation and Measuring Progress Division, Directorate for Education and Skills 

In 2014, over 3 million students in OECD countries – more than double the amount in 2000 – were studying outside their country of citizenship. International students go to study in countries with reputations for academic excellence; but they are frequently also seen as seeking economic and social opportunities in the host country.

As many countries seek to restrict immigration, international students are becoming a targeted population. One of the policies that aim to reduce the number of incoming international students is charging higher tuition fees for international students compared to national students (“national” meaning outside the European Economic Area [EEA] in the case of European countries). Countries also hold the view that national resources and taxpayers’ money should not be spent to subsidise international students, so they increasingly aim to charge the full tuition cost to international students. Some of the countries that have put themselves firmly in the market for international students in recent years also see fee-paying international students as an important source of revenue for their higher education sector.

The current Education Indicators in Focus brief, based on the most recent data on international student mobility and tuition fees published in Education at a Glance 2016, looks into the reforms differentiating tuition fees between national and international students. The majority of OECD countries still do not differentiate fees between the two categories, but a growing number of countries do. As the chart above shows, in some countries the differences are significant. In Australia, Austria, Canada, New Zealand and the United States, foreign students pay double or more the tuition fees charged to national students, on average, while Sweden and Denmark charge no fees to national students but ask international students to pay more or less the full cost of tuition.

It is well known that exporting education services has become an important economic activity in some countries, including Australia, New Zealand, the United Kingdom and the United States. Fee-paying international students generate a considerable revenue stream to higher education institutions; they also consume other goods and services and thus contribute to the host country’s economy. But to what extent do universities in these countries benefit from this source of income? There are no data available to make reliable estimates for a large group of countries; but for Australia and New Zealand, countries that vigorously market their higher education services, the income from fee-paying international students equals over one-quarter of the total expenditure on higher education. By contrast, in the United States, income from these students represents only 2.4% of total expenditure on higher education; in Canada, it represents only 8.2%. But it is interesting to see that in Denmark – a country that traditionally considers free higher education to be a right, but introduced tuition fees for non-EEA students in 2005 – the income generated by international students now equals 13.3% of total expenditure on higher education.

Universities are genuinely concerned about their place in the global scientific research and education system. They thus see the internationalisation of their institutions as part of a wider strategy. But at the same time, it is clear that in several countries fee-paying students generate welcome additional revenue at a time when public funding is insufficient to cover costs. As is evident from the political debate in several countries, this creates tensions between universities’ policies to defend their commercial interests on the one hand and governments’ restrictive immigration policies on the other.

These developments fundamentally alter the position and perception of international students. From being a desirable addition to the student population, a source of global relevance and diversity, they are now regarded as either cash-cows or scroungers of national resources, taking away benefits and opportunities from locals. It remains to be seen how these students will react to these developments. The current Education Indicators in Focus brief provides some evidence, based on observations in Denmark, New Zealand and Sweden, that introducing fees for international students did result in a drop in their numbers in subsequent years. International students are looking for the best education at a reasonable cost, balancing perceived academic excellence and reputation against cost and hospitality.

As long as higher education systems in emerging economies are not able to match growing demand with sufficient high-quality local supply, students will continue to cross borders to seek education opportunities. For destination countries with excellent higher education systems, international students offer a lot of benefits – but only if they are regarded as welcome additions to the student population, and not as cash cows or opportunistic free-riders.

Links
Education Indicators in Focus No. 51: Tuition fees reforms and international mobility
Education at a Glance 2016: OECD Indicators
Podcast: International Tuition Fee Policies: An Interview with Gabriele Marconi
Follow the conversation on twitter: #OECDEAG

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Chart source: OECD (2016), Education at a Glance Database, http://stats.oecd.org/.

Who pays for universities: taxpayers or students?

by Dirk Van Damme
Head of the Innovation and Measuring Division, Directorate for Education and Skills

There are few issues in education that raise as much political and ideological controversy as tuition fees for higher education. Across many countries a broad consensus has developed that public education in the age of compulsory schooling should be free of charge. Even Adam Smith considered free public education for the young as a central obligation of the state, for which the cost should be shared through taxes. But the question of how to distribute the financial cost of education beyond the age of compulsory schooling – for early childhood education, adult education and training and/or, especially, higher education – has kindled heated debates in recent years, particularly as national budgets shrink and the cost of high-quality education balloons.

Education at a Glance has documented the shift towards greater private funding of higher education in many countries over the past years. The rationale for this shift is the continuously high and even increasing financial returns that a higher education degree generates over a lifetime. Higher education could thus be considered a private investment for which individuals should bear most of the cost. Funding higher education with taxpayers’ money risks a reverse redistribution of social wealth from the poor to the rich, thus aggravating, rather than reducing, social inequality. The state’s responsibility is to design a framework for equitable and transparent funding regimes that also ensures access for students from poorer families through financial support systems of grants and scholarships. These arguments have convinced increasing numbers of governments to shift the burden of financing higher education to students and families.

Yet some countries maintain a welfare state-oriented social contract for higher education, where the cost of universities, like the cost of other social, cultural and educational services, is paid through progressive taxation. The private financial return on a higher education degree is largely skimmed off, through high and progressive income taxes, to become a high public return on the state’s investment. Open access and high enrolment rates prevent the system from working to the advantage of only a small part of the population. However, this model only works in a political system where high income taxes to support general social and educational services are widely accepted.

These divergent views are reflected in the huge differences in the amount that students and families have to pay for a year of university education. The most recent Education Indicators in Focus provides new data on tuition fees. The chart above presents the average annual tuition fees in a range of countries with comparable data. The chart clearly shows that the private cost of higher education, in the form of tuition fees, differs widely among countries. Obviously, within each country tuition fees for individual institutions can also vary; but the national average gives a good idea of the general approach and political preferences of a country.

On the top are countries where the cost is highly privatised; on the bottom are countries where higher education is funded through taxation, hence with no or limited tuition fees. The group on the top includes liberal market economies in the English-speaking world and Asian market economies, but also emerging economies with expanding higher education systems, such as Colombia. The group on the bottom is mainly composed of Nordic welfare states and some transition economies. In the middle section are countries that adhere to a mixture of both ideological positions.

Each model has strengths and weaknesses, not to mention technical challenges. Countries where the cost is privatised need to develop fair and transparent ways to set tuition fees. For example, tuition could be related to field of study and, ultimately, future earnings. These countries also need to determine conditions for loan systems and their income-contingent and means-tested repayment schemes. And above all, they need to secure equitable access to higher education through student support and financial aid schemes. If these policy conditions are met, these systems seem to be able to secure sustainable funding for universities.

Countries with a welfare-state model of funding higher education see participation in higher education as a right to which all capable students are entitled. The high long-term social and economic public returns – generally much higher than the direct costs for the state – ensure that the upfront investments in higher education pay themselves back in higher incomes taxes and lower social security expenses. The main challenge for such countries is to assume the fiscal consequences. Shrinking state budgets and growing resistance to high levels of taxation in such countries might result in dwindling funding for higher education – and for university-based research and innovation that fuels the knowledge economy.

But the most serious risks are for the countries in the middle section of the chart, those that don’t seem to be able to make a clear policy choice.  They might combine the risks of the two models but without enjoying their benefits, leading to a deadlock on both the public and the private side of the funding mix. In these countries, universities pay the price of political indecisiveness.

Ideologies always claim absolute validity of their arguments. Yet in policy making the challenge is to find the smartest approach that yields the best outcomes the most efficiently. What 21st-century knowledge economies need is a system of higher education that generates globally competitive research and innovation and provides high-quality education that is accessible to all talented students. This doesn’t come cheap, and countries have to assume the cost, whether through public and/or private funding. But the long-term price of underfunding higher education is much higher than the short-term cost to both taxpayers and students. An inability to make a clear policy choice seems to be the costliest (non-)choice of all.

Links:
How much do tertiary students pay and what public support do they receive? Education Indicators in Focus, issue No. 41, by Eric Charbonnier
Combien les étudiants paient-ils et de quelles aides publiques bénéficient-ils ? Les indicateurs de l'éducation à la loupe, issue No. 41 (French Version)
Education at a Glance 2015: OECD Indicators
Chart source: OECD (2015), Education at a Glance 2015: OECD Indicators, OECD Publishing, Paris, http://dx.doi.org/10.1787/eag-2015-en, Table B5.1.