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26 August 2005 Funding Tertiary Education The debate over funding tertiary
education has become confused in recent years. Two separate issues need to be
disentangled. The first is what proportion of tuition costs should
students pay in fees. The second is how the cost of those fees should
be met. Who should pay? There are two main
alternatives: students and their parents, or taxpayers. If all the future benefits of a
student's higher education went to other people - the public at
large - then the answer to the question 'Who should pay?' would
be taxpayers. In this scenario, students would not care which courses
they took: they would get no financial or other benefits from their
choice. Clearly, this scenario is unrealistic.
Students generally derive substantial benefits from higher education,
not least a higher earning potential. They choose their courses
in relation to their own aptitudes and judgments on what would benefit
them most. There are other arguments for student
contributions to the costs of tuition: most students come from better
off backgrounds and go on to enjoy higher lifetime earnings than
other taxpayers on average; tertiary institutions have stronger
incentives to meet students' needs; students have stronger incentives
to make good course choices and work hard. In addition, governments in coming
years will be under pressure to devote more resources to meet the
health and other needs of an ageing population, while constraining
taxes to internationally competitive levels. Taxpayer resources
to fund higher education will be limited, and in the absence of
student fees the quality of institutions will decline and access
will be rationed. What proportion of tuition costs
should students bear? Currently the average is around 25-30%. The
last major official examination of this question was by the 1994
Ministerial Consultative Group. Four of its 10 members supported
a progressive increase to 50% on an income-contingent basis and
in combination with targeted assistance. Four supported a rise to
25%, and the others (student representatives) supported essentially
the status quo (then around 20%). The debate on taxpayer support
for tertiary education should focus on the level of tuition subsidies
(and student allowances). Subsidies should not be channelled through
the loans scheme. How the cost of student contributions
should be met is a separate matter. The sources of first resort
should be a combination of parents' saving plans, part-time and
vacation work by students, employer bonds, bank loans and scholarships.
Such arrangements are the norm in the United States, which is widely
regarded as having the world's most successful higher education
system. In New Zealand about half of all students (and/or their
parents) currently meet tuition fees and living costs without taking
out a student loan. A government loan scheme to overcome
any capital market failures should be a funding source of last resort.
There is nothing wrong, however, with borrowing to invest in human
capital. Much commentary focuses on student debt as though it is
not matched with any asset. If it is really being argued that New
Zealand tertiary education is a worthless asset, we should be seriously
concerned. Making a government loan scheme
concessional in addition to subsidising fees is a serious mistake.
It encourages excessive borrowing and creates incentives to rort
the system. The government's decision to make
loans interest-free while students are studying has increased student
debt. Labour's proposal to wipe interest altogether for borrowers
resident in New Zealand would compound the problem. It discriminates
against students who have avoided borrowing, means taxes will be
higher than otherwise, and does nothing to increase resources available
to tertiary institutions. In addition, as Nicholas Barr of the London School of Economics has pointed out, forgoing interest helps the wrong people:
National's plan to make interest
on loans tax deductible is also misguided. Deductibility goes together
with taxable income. We don't make home mortgage interest payments
tax deductible because the imputed rental value of owner-occupied
houses is not taxed. Nor do we tax increases in capital value. The
situation with student loans is analogous. Like housing, education
is already preferentially treated for tax purposes. A better alternative to both these
proposals is to cut taxes. Tertiary education is expensive.
Public policy for funding it needs to be based on sound principles. Recent governments have failed to spell out clearly the respective rationales of fees and loans. Unless they do, vested interest groups like student associations will continue to lobby for more subsidies and we risk ending up with more bad public policy in this area.]
Roger Kerr is the executive director of the New Zealand Business
Roundtable.
For more information, contact: Roger Kerr Web: www.nzbr.org.nz |