Sunday, January 01, 2006

Funding higher education - Part 2: A working model from Australia

In the previous post, I argued for moving towards a system in which a student pays 100 % of the cost of college education. If he/she pays a smaller fee, the shortfall must be made up from clearly identified sources: government, philanthropy, alumni or other sources.

I realize that the cost, at about Rs. 100,000 per year, may appear prohibitive to a large number of people. There ought to be a viable mechanism by which this burden is lessened. Educational loans are a possible answer. But, they are not automatic, since the loan-granting prerogative rests with banks, which cannot commit themselves to the cause of higher education. Banks would always ask "what if the loans become risky?".

Recently, the World Bank suggested a model by which the students pay a smaller fee upfront and pay the rest on graduation. Several commenters panned this model (see, for example, this post by Reuben), because it was seen as an unfair emigration tax targeting those people who leave the country on graduation. Satya, on the other hand, argued that this may re-framed to make it more attractive. The Hindu carried an opinion piece sometime ago supporting the idea of a deferred fee.

Some online resources:

Higher Education Funding Policy (a long paper).

Higher education in Australia: Structure, policy and debate (slides which provide a quick summary).

The changing Australian higher education system (a paper that analyzes the trends)

Recently, I learned about the Australian system of funding higher education, which is a working model of the 'deferred fee' idea. Those who want to learn about it directly from the Australians may wish to go to the articles listed in the sidebar. Read on if you would rather have my short, simplified introduction (which gets only the essence right, but not the details).

In this post, let us forget about the money that colleges and universities may get from any source other than the students. In fact, some of the government grants are proportional to the number of students in the institution; I have no idea about the per-student value of these grants. In the rest of the post, let us concentrate on the cost to the student, which is taken as 'X' per student per year. The student has two options.

  1. He/She pays this money upfront, or
  2. He/She chooses to pay a slightly larger amount (say, 25% larger) after the course is over. The government pays his/her fee ('X') to the university.

Clearly, there is nothing for me to add in the first case! The second case is more interesting. From the student's point of view, the fee amount is essentially a 'loan'. Except that (a) this loan is from the government, (b) it is for a larger amount than X, (c) it is interest-free, and (d) it is automatic (nobody is denied a loan, because he/she is not loan-worthy).

The part about loan repayment is quite interesting. When the ex-student who is now an employee earns a salary that exceeds a certain amount, a slightly higher tax (say, 2 % higher) is levied. The critical amount of salary when this additional tax kicks in is pegged to the median salary. Thus, the loan is thus paid off over several (or many) years, depending on one's salary profile.

Prior to 1997, all college graduates paid the same fee; since that year, however, there is a differential fee structure, with liberal arts at low fees, and professional courses at higher fees. Colleges are given some freedom to choose their fee structure within a narrow band. From 2005 onwards, students in two programs don't have to pay anything at all; the government pays their fees.

The two programs with zero fees are in education and nursing, which have been classifed as National Priorities. These Aussies are amazing!

This is the essence of the Australian system. It is flexible enough to take care of most people's individual situations and wishes. For example, while the loan is interest-free, it is inflation indexed. If your salary is far higher, a 3 or 4 % higher tax is levied (instead of the standard 2 %). An employee may also choose to repay more than what is paid through tax-deductions; such additional payments of, say 500 Australian dollars, can be used to wipe out a debt of (say) 550 dollars, thus encouraging people to repay the loan earlier.

What if the student's salary over his/her lifetime is not enough to repay the loan? The government takes the hit, very slowly, over 30 to 35 years!.

This system seems fair, clean and easy to implement. It doesn't require the creation of additional layers of bureaucracy. If the system malfunctions, the bad effects also fall on both students and the government. Thus, it aligns the goals of the students with that of the government: keeping the education system in top gear.

While the person who introduced the Aussie system to me seemed comfortable with it, I have to confess my ignorance on whether the broader population is happy with this arrangement, which was introduced in 1989, and has been through only minor tweakings over time. If any of you know of significant critiques of this system, please leave a comment.


  1. Anonymous said...

    1. I agree that unless education system is liberalised and private institutions are allowed to charge whatever fee they deem fit, there won't be quality higher education possible.
    2. Government giving automatic loans with deferred payments over a 30-35 year period. I have few issues here. I have low opinion of Indians attitude to paying money back to the government. There has to a be stronger enforcement model. 30-35 years may be a bit too much and there could be mortality to consider. I would look at a 10-year repayment period as a max.

    Note that the higher cost of education is normally engineering and medical oriented. Here, the earning ability also goes up. (Notwithstanding the 4000+ Indian doctors stranded in UK without work and pay, and depending upon charity from local Temples.)

    Private players, particularly companies looking at hiring these graduates should be allowed to pitch in funding if they wanted to. They can sweeten the deal by offering the students a higher loan at better terms than the govt. However there could be strings attached to this deal which a student may agree to consider - or not. There is always the failsafe Govt. driven loan process.

    Controlling corruption (by Govt. officials) would be a key issue. Other forms of abuses may also have to be dealt with.

  2. Anonymous said...

    Oh, and another thing. The repayment amount must be 100% tax deductible.