ED074884.tif.pdf

DOCUMENT RESUME

ED 074 884

HE 003 682

AUTHOR

Woodhall, Maureen

TITLE

Financing 'Students in Higher Education:'Educational,

Social and Economic Implications of Alternative

Methods of Finance.

INSTITUTION

United Nations Educational, Scientific, and Cultural

Organization, Paris (France). International Inst. for

Educational Planning.

REPORT NO

IIEP-TM-42-69

PUB CATE

[69]

NOTE

13p.; Paper in The Fundamentals of Educational

Planning: Lecture-Discussion Series

EDRS PRICE

MF-$0.65 HC-$3.29

DESCRIPTORS

*Educational Finance; *Educational Planning;

Financial, Support; *Higher Education; Public Support;

*Scholarship Loans; Student Costs; *Student Loan

Programs

ABSTRACT

This lecture is part of "Fundamentals of. Educational

Planning; Lecture-Discussion Series,"

a controlled experiment aiming

at the development of efficient teaching materials in the, field of'

educational planning.'The author discusses (1) the justification for

public subsidy of higher education;

(2)

methods of subsidizing

students;

(3) the objective of student aid programs;

(4) grants

versus loans for students; and (5) 'the evaluation of systems of

student aid. In addition, reading materials

are suggeSted for those

who wish to pursue the topic further.

(HS)

FILMED FROM BEST AVAILABLE COPY

The Fundamentals of Educational Planning

Lecture

Discussion Series

No 42 FINANCING STUDENTS IN HIGHER EDUCATION:

EDUCATIONAL, SOCIAL AND ECONOMIC IMPLICATIONS

OF ALTERNATIVE METHODS OF FINANCE

by Maureen Woodhall

U.S DEPARTMENT

OF HEAL.

rH.

EDUCATION

& WELFARE

FFE OF

EDUCATION

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Unesco :

International Institute for Educational Planning

co,

IIEP/TM/42/69

INTERNATIONAL INSTITUTE FOR EDUCATIONAL PLANNING

9, rue Eugene Delacroix.

Paris 16e, France

FINANCING STUDENTS IN MOM EDUCATION:

EDUCATIONAL, SOCIAL AND ECONOMIC IMPLICATIONS

OF ALTERNATIVE METHODS OF FINANCE

Maureen Woodhall

This lecture is part of 'Fundamentals of Educational Planning;

Lecture-Discussion Series' a controlled-experiment undertaken by the

International Institute for Educational Planning in collaboration with a

limited number of organizations'ind individuals aiming at the development

of efficient teaching materials in the field of educational planning.

their very nature these materials, whichdraw upon tape recordings, trans-

criptions- and summary notes of seminars, lectures and discussions conducted

by IIEP as part of, its training and research programme, are informal and

not subjectto the type of editing customary for psublished:docuMents

They

are therefore not to be Considered as lofficialpublleations'

The opinions expressed in this lecture are thoSe of the author and

do not necessarily:represent 'the:views-of the Institute.

IIEP/TM/42/69

CONTENTS

Pqft

The justification for public subsidy of higher education

Methods of sUbsidizing-students

The objective of student aid programmes

Grants versus loans for students

The evaluation of systems of student aid

Suggested Additional Reading

IIEP /TM/k2 /69 - page 1

The justification for public subsidy of higher education

In recent years the rapid expansion of higher education throughout

the world has emphasized the problems of financing

the most expensive level

Of educatiOn,

Costs per student in higher education tend to be

very much

higher than costs per pupil at any other level of

education. In most

countries higher education is financed by a combination

of public and

private sources of funds.

Even if universities do not charge tuition fees,

the student himself normally bears

a considerable part of the total

resource cost of education in the form of the earnings forgone while he

continues his education, instead of joining the labour

market. These

forgone earnings represent one of the costs of higher

education both to the

individual - who loses income he would have' received

if he were not a

student 7 and to the community -which loses the

output the student would

have produced if he had joined the labour market.

On the other hand, even

if universities do' charge fes these generally do

not 'represent the full

'costs of tuition, so that some form of subsidy

is required to finance the

current and'capital expenditure of universities.

The question of how higher education should be financed,

and what

should be-the balance between public and private

contributions raises a

number of issues.

For example:, what level and form should public

subsidy

of education take and what is the justification

for this subsidy;

should

financial assistance be giveh directly to institutions

of higher education,

to enable them to reduce or abolish fees,

or to students, to,enable them

to pay, fees;

should public subsidies for higher education

be financed, out

of general taxation or in some other way?

This paper is concerned with

the issue of financial aid forstudents:

what are the objectives of

student aid schemes in different countries;

what form and level does

financial assistance take;

what are the criteria for selecting students for

aid;

and finally how should alternative systems

of student aid be

evaluated?

But since financial aid to students is'only::one form

of public subsidy

of highe.r education., it is interesting to consider

first the ;justification

for subsidization of higher education out of

;public funds.

The main economic,

justificatiOnforproyiding publid;:financejor

any service is that society

aS a whole deriVes somenefitfrom the

Servic0.,

and

.:that

would be

neglectedlor reduced if,it:were leftentirely to

priVate individualS,to finance

Thus subsidy of higher educatiOn,JS JUStified,bY:the

argument,:that it

producesbothHedonomicandsocial benefits for society, including highly

qualified, manpower, cultural and aesthetic values,

ac.

lions tojIhmanknowledge,

and.So,on..: Itjs, recognised that higher, education

al;

pr06:,.irecteconomi0

andnorp7eConOmid benefits:forthe:educated

individuals themSelVeS,'butthe

case.fOr:,publid,SUbbidyrests';onthe

belief-thatthebenefits to society exceed

theipenefitsto*indiViduals.,

IIEP/TM/42/69 - page 2

There is another argument for public subsidy of higher education.

opportunities for higher education were given only to those who could afford

to pay for it, it would be both inefficient and inequitable.

It would be

inefficient because some of the most able students would not be able to

afford to continue their education, and it would be inequitable because

higher education confers benefits on the individual in the form of better job

opportunities and higher lifetime earnings, so that to distribute education

in accordance with individuals' purchasing power would mean preserving and

exaggerating inequalities of income in the future.

Thus the subsidy of higher education out of public funds has both an

economic and a social justification.

The next question that must be answered

is what form the subsidy should take, and how it should-be financed.

The

following table summarizes various possible ways of subsidizing higher

education.

Table 1.

Alternative methods of financing and subsidizing higher education

Methods of subsidy

Methods of financing

1. Direct subsidy to institutions to

eliminate or reduce fees

2. Direct subsidy to students in the

form Of unconditional grants

3. Direct subsidy to selected students

in the form, of means- tested grants,

scholarships

or bursaries

4. Direct:subsidy to students; in, the

form of guaranteed:loans at

interest:

rates

5.- Direct subsidy to studentSHin the

form Of: specially provided part7

time paid eMploymentor meals and

accommodation at prides below

market pricet

....11.==1.1,-T.

1. General taxation of income (at

central or local level)

2. General taxation of expenditure

e.g. sales tax, excise duties

(at central or local level)

3. Special taxation of graduates'

.incomes

. Loan repayments of past students

6.: Direct subsidy m parents or:'to

graduates in employment, in the

jOrm of tax:condessiOns:feir edu-

cationaiexpenditUres

IIEP/TM/42/69 - page 3

methods of subsidizing students

Most countries ,subsidize higher education by means of

a combination of

direct payments to institutions, to cover capital and current

expenses, and

payments to some individual students, to

cover fees where necessary, and also

living expenses.

The payments to students take different forms in different

countries.

Many countries, both developed and developing, have scholarship

schemes under which grants are made to selected students, chosen either

the basis of ability or of financial need.

These grants are sometimes

unconditional, as for example in the United Kingdom, where all students who

gain admission to a university are eligible for consideration for

a grant,

although the amount a student receives is subject to

a means test, and thus

determined by the level of his parents' income.

Alternatively, the grant

may be subject to certain conditions, for example in Ghana students receive

grants on the condition that they work for the government

on graduation.

A number of countries, both developed and developing, give

some aid

to students in'the form of repayable loans, with

or without interest, rather

than outright grants.

Loans now constitute some part'of the finance of

higher education 'in at least ten advanced.countries, U.S.A.,

Canada, Japan,

Australia, Sweden, Norway, Denmark, Finland, Western Germany and

the Netherlands, and a number of developing countries, including

India,

Kenya, Colombia, Venezuela, Peru and thelDominican

Republic,

Another form of financial assistance 4.:;o students is specially

prOvided.part-time paid employment,

Many American universities have'for

some time operated private schemes of this sort, and in 1964 the Federal

Government set up the College. Work.Study Programme, which provides

Federal

funds to colleges and universities to enable them to expand job oPpor-

tunities for students.

The proportion of students receiving direct aid varies considerably

between countries.

In some developing countries less than 3 per cent of

students in higher education receive any form of scholarship, whereas in

the U.K. and Scandinavian countries over 70

per cent of students receive

some direct aid.

A survey carried out in 1959-60 for the international

Study of University Admissions showed that taking all

countries together,

32.9 per cent of students in higher education in developed

countries

received direct aid, and 8.7 per cent in less developed countries.

Table '2 summarizes the proportion of students receiving

aid in ko

countries.

IIEP/TM/42/69 - page 4

Table 2.

Percentage of students receivingdirect aid in various countries

Nil

0-3 4-8

9-15

16-30

31-50

51-100

Developed countries

Less developed coun-

tries

Total

114-

Finally, most countries provide indirect subsidies to students, as well

as making some direct payments.

It is difficult to obtain accurate data on

levels of expenditure on indirect aid, since it is sometimes financed by

ministries other than the Ministry of Education, but

no review of financial

aid to students would be complete without consideration of expenditure on

housing, food and.traVel subsidies and medical and welfare expenditures:

The objectives of student

Student aid schemes in different countries may have a number of different

objectives.

The International Study of University Admissions, conducted by

Unesco and the. International Association of Universities, included a brief

review of financial aid schemes for students, and classified the schemes into

four main categories:

(a) 'seed-bed.' schemes, generally found in the poorest and educationally

most backward. countrieso, Such schemes provide aid for a handful

of students, and their main purpose is to promote a rapid expansion

of education at a later date;

(b) Ymanpower

schemes, whose chief aim is to provide aid to meet a

country's requireMentS for various types of skilled manpower;

(c)

' equalization' schemes,: whiCh are concerned with increasing and

equalising educational; opportunities) and-their main purpose is

to ensure that no ablestudent it preVented from continuing his

education by financial. need;

(d) 'salary' schemes, under which aid is given to all students,

regardless of their own or their pal,entslMeans, and thus aid,

becoMes) in effect.e:salarTpaid by the Stateto all Students.

IMP/TM/42/69 - page 5

These four categories demonstrate that different student aid schemes

may be intended to fulfill different objectives.

For example, the objective

of 'manpower' schemes is primarily economic, while 'equalisation' schemes

have a mainly social justification.

This method of classification is il-

luminat ing but unfortunately there

are few student aid schemes that can be

neatly classified in terms of a single category.

In most countries, student

aid policy has a number of different objectives, including economic, social

and educational aims.

When administrators of State student aid schemes are

asked what is the main purpose of student aid, they may reply

to encourage

demand for education' or

to equalise educational opportunities', 'to ensure

a sufficient supply of highly qualified manpower for the labour force' or

'to allow students to use their time in the most instructive way, so that they

are not forced to work part time or to interrupt their studies, because of

financial difficulties'.

In fact, in most countries student aid is intended

to satisfy all these objectives at once, which makes it difficult to eva]uate

fully most student aid schemes, because their aims are so diverse.

For example, in the U.S.A. there are two State subsidized loan schemes

for university students, the National Defense Student Loan Program and the

Guaranteed Loan :.rogram for Higher Education.

The purpose of these schemes is

to provide low interest loans for students in low-income or middle-income

families, to enable them to continue their education.

Thus one of the main

objectives of the scheme is, the equalisation of educational opportunity.

But

one particular characteristic of the National Defense Student Loan Program

has an economic justification:

to encourage graduates to enter the teaching

profession, in order to overcome a teacher shortage.

Graduates who do enter

teaching are forgiven part of the repayment obligation;

any teacher has

10 per cent of his loan repayment obligation cancelled for each year of

service as a full-time teacher, while teachers in low-income areas, or

teachers of handicapped children have 15 per cent cancelled for each year's

service.

Thus, this particular student aid scheme has both an 'equalisation'

and a 'manpower' element.

The fact that stUdent aid schemes have many,different objeCtives is

very important when attempting to evaluate theeffeCtiveness of student aid

policy.

If the:adM of financial: assistance is simply to increase demand for

higher education, ajirst assessment of its, effectiveness,can be made by

looking at enrolmentfiguret.;, But if the aim Of student aid is to equalise

opportunity it is necessary to have information on the social class background

of students, and tcloexAmip..-trends:in social class participation rates in

higher education.

The effect of student aid policy on educational efficiency

must alsobe judgekin the light of the effetts:of.financialassistance on

students'proPensity to part time WorkOnthe:averagelength::Ofstudy and on

wastagerates::inihigher: education*

Thusanyttudent didiolicy must be:

evaluatedin::terms of its eConomici,'socie.):andedUcational implications.: In

the following section we will examine some of the implications of two

alternative methods of SubSidizingitudents

by'meantof outright grants

and scholarshipss Or:bTmeans: of repayable loans,

IIEP/TM/69 - page 6

Grants versus loans for students

Loans have been justified by some writers as a means of financing students

for a number of reasons.

At the same time other writers have attacked the idea

of loans, and argued for a system of outright grants.

The arguments can be briefly

summarized under five headings:

(a) The supply of finance for higher education

Economists in Britain and the U.S.A. have argued for the use of loans to

finance students on the grounds that this will increase the overall supply of

finance for higher education.

In the short-run it makes little difference,

whether financial aid is given in the form of grants or loans, since funds must

be found to make the initial payments to students.

On the other hand in the

long-run there is a saving of public funds if the student is required to repay

all or part of the loan.

The extent of the saving depends on the, period of

time which graduates are allowed, in order to repay, and the interest 14hich

they must pay.

Many loan schemes, for example in Scandinavia, provide interest

free or low interest loans.

In Denmark, for example, students receive aid in

the form of 50 per cent grant, 50 per cent interest-free loan;

in Norway,

interest is charged at 4 3/4 per cent.

Thus the saving involved in the loan

scheme is less than if full commercial rates of interest were charged, but

some

saving of public funds is nevertheless achieved.

Another possible way in which

a loan scheme may increase the supply of finance for higher education is by

tapping private sources of finance.

For example, in Finland, and in the

U.S.A. under the Guaranteed Loan Program, the initial loan for a student is

provided by private banks, but under a government guarantee.

In such cases

the government subsidizes the interest on the loan, and meets the cost of

cancellation of loans in cases of hardship or illness, or in the event of a

graduate defaulting, but public funds are not required to finance the initial

payments to students.

Thus loans are often justified as a means of overcoming

one of the long-term constraints on the development of student aid:

shortage of public revenue.

(b) The benefits of higher education

Advocates of loans argue that since higher education confers financial

benefits on the edUcated, graduates should:repay part of the,coSt of their':

education out of the higher:Iifetime earnings they enjoy as

a result of 'thiS

education

On the:Other:handadvocates of:.grants frequentlyargUe, that

society as a whole benefits in botheconoMic and non

- economic terms, from

higher education; and the'supplY'of highly qualified manpower,,So that

society as a whole:SY,Iouldfinancehighereducation'Outof"generaltaxation

In fact:the .:1benefi.t principle:of taxation

that he whobenefitsfrom a

serviceshould':prOvide the finance for that Seryipeean::be uSedt6Hsupport

private payments and publieSbSidy,sincehighereducationprovidesbenefits

bOth for the :individualand: fOrsodietY. *Iopmbia,the COlombian'Institute

for AdvancedTtaining Abroad:(ICETEX) which:administers aid torstudent§'

IIEP/TM/42/69 - page 7

higher education both in Colombia and abroad,

gives loans ratherthan scholar-

ships, on the grounds that 'education is good business, the

profit reaped, by

the student being commensurate with the capital invested'.

On the other

hand many scholarship schemes are justified in terms of the

contribution made

by highly qualified graduates to national income, the country's

need for

qualified manpower, and the indirect

or 'spillover' benefits generated by

investment in higher education,

The disagreement between advocates of loans

and of grants is essentially over the degree of subsidy required

to ensure

optimum investment in higher education from the point of view

of society.

Closely linked with arguments about, the benefits of higher

education

are arguments abOut the equity of alternative methods of finance,

Loan

advocates argue that loans are more equitable than grants,

since graduates,

who earn more than average as a result of their education,

provide finance

themselves, by repaying loans out of these higher than

average earnings,

whereas a grant scheme involves a transfer of income from

the general

taxpayer with average or below average earnings to those who

will have high

lifetime earnings.

On the other hand oPponents of loans argue that the need

to repay loans will discourage working class students from

entering higher

education, and that grants will be more successful in equalising

educational

opportunity,

(d) The efficiency of higher education

Grants are often justified on the grounds that freedom from

financial

worry allows the student to work hard, and that fears of incurring large debts

may force students to take up.part-time work or even to drop out of higher

education before completing their courses.

In fact part-time work among

studentS is a common phenomenon in many countries,

but explanations for this

are closely linked with the way university courses are organiSed, the length

of time needed for a degree and similar characteristics

in the structure of

higher education.

There is little direct evidence on the relationship

between methods of financing students, and length of, study

or patterns of

part-time employment.

) Practical problems of

administering a loan scheme

Sometimes loans are attacked as unfeasible because of

certain practical:

difficulties in implementing a loan scheme.

FOr:example, how is it poSsible to

make concessions to graduates who have low incomes

a result of illness,

unemployment

or the:::Ohoice of.lOwindomeoccuPations?

How,isHthe problem

of the married Womangraduatewho giveSAT working: to,be sOlVed

How:will

the authorities :,SolyeSudhPrOblems:AS.:non7rePaymenbtdefaulter0,.

or by

graduate's who emigrateI

fact, those coUntriehat:haVe adoptedjOan

Schemes'have:notfound.-such4voblemsto.beitisuperable. :J46st loan:schemes

include some element of ...'insurance', so;:that.:,gr4duateS

are ;permitted to

IIEP/TM/42/69 - page 8

postpone repayment in the case of financial hardship.

It is'true that a loan

scheme requires an efficient adminiStrative structure to ensure that repayments

are made regularly, and to deal with cases of hardship,

But in Scandinavia

the costs of administering the official loan schemz,s amount to only between

1 and 2 per cent of the total annual expenditure by the ilpvernment on student

aid.

The evaluationofsystems of student aid

The aim of this brief paper has been to demonstrate that student aid

policy in different countries is intended to satisfy many different objectives,

and to show that there are alternative means of providing financial aid for

students.

Scholarships constitute one, but by no means the only, way of giving

direct financial assistance to students

Loans represent a feasible alternative,

and in some cases appear to be successful in.increasing the supply of finance

for higher educations

But it is sometimes claimed that this is at the expense

of certain undesirable consequences, particularly in discouraging working class

students.

In fact the reasons for low working class participation in higher

education are extremely complex, and the structure of the educational system,

methods of selection, and traditional attitudes must be analysed

as well as

methods of finance.

In order to evaluate loans as a method of financing higher education

information would be needed on such issues as:

(i) What is the extent of public subsidy of higher education?

(ii) What is the stated justification for this degree of subsidy?

(iii) Has there been any attempt to estimate the private and social

benefits of education?

(iv) What are the conditions of eligibility for loans?

(v) What are the terms of repayment?

(vi) What is.the average level of debt of university graduates;

the end of their course?

(vii) What is the extent of part-time employment

among students?

What evidence is there of the effect of loans

on part-time

employment?

(viii) What alternative forthe of finance are utilised by students?:"

IIEP /TM/k2 /69 - page 9

(ix) What is the

average length..

and rate of wastage among

students?

What evidence is there of the effect of loans

wastage or length of study?

(x) What is the social composition of the

student body?

(xi) What is the sex composition of the

student body?

(xii) What evidence is there

on the attitudes of women or working -

class students to loans?

(xlii) Are special concessions given to

graduates with low incomes or

to married women?

(xiv) What are the general attitudes of

students towards loans?

(xv) What are the costs of administration?

(xvi) What are the practical problems of

administration in a student'

loan scheme?

(xvii) Are there any built-in flexibilities

in the scheme, such as

favourable repayment terms for particular

groups of graduates?

(xviii) What are the financial savings

produced by aloansscheme?

(xix) What have been. the.-effects of changes in the method of

financing?

(xx) What proposals for reform of "che finance

of higher education have

been-put.-forward?-

These data would then need to be compared with similar data for

country operating a grant scheme, as opposed to

a loan scheme for students.

It would then be possible to evaluate loans and grants in

terms of the

objectives of student aid policy in each country.

Such an evaluation would require a major research project.

Some

information is available on loan schemes in the U.S.A. and

Scandinavia, and is

given in the bibliography.

But a full evaluation of alternative methods of

finance requires more information than is yet available.'

However,..the educational planner may gain some insights about the relative

merits of alternative methods of financeby analysing the

objectives of student,

aid. in his own country.

The International Study of University Admissions

con-

cluded its review of student aid with the observation:

IIEP/TM/42/69

page 10

'Few countries have decided what their aid

r'ogrammes should achieve.

It, is still rarer for this to be done in any detail

on the basis of

manpoWer studies, for instance.

AdminiStrative failure's and the posi7-'

tion of aid as:the poor relation among eduCational: problems'

also

meant thatrarely has the best possible use been madeofthe limited

funds available.

Aid schemes cannot be expected to

promote a

country's adUcational

economic or social developmentefficiency if,

as at present, no)?asii for their assessment end 'evaluation exists"-,

Some :progress,has been made, since the publication of that statement,-

towards the proper evaluation of alternative Methods of finance; but-Anore

research is needed, to ensure that

student aid policy is an effective instrument

for helping to achieve a Country's eduCatiOnal, social-and economic aims.