Higher education finance might be the last thing on America’s minds when they cast their votes on Tuesday. However, the fact that both candidates have set out plans to reform the US’ student loan repayment schemes is perhaps indicative of the importance of this issue in the US. The problem is, both candidates are just messing with the small print, and their plans which will do very little to help graduates struggling with student debt.
Trump intends to push for an income-driven repayment plan that would increase the level of the payments students have to make (by increasing the cap on payments from 10 to 12.5 percent of income) but reduce the repayment period to 15 years from its current period of 20-25 years (depending on the scheme). Meanwhile Clinton has endorsed the current plans, with the caveat that she aims to simplify the number of plans.
But will these proposals help students who are struggling with their loan repayment? The short answer is no.
By Maria Racionero & Elena Del Rey, Centre for Economic Policy Research, Research School of Economics, Australian National University
There is a growing trend around the world towards increasing students’ contributions to the cost of higher education. One of the advantages is that, when students pay for their education, they do so in the country where they study. Relying on tuition fees to finance higher education can however be both inefficient and unfair, preventing access to higher education to liquidity constrained but academically deserving individuals. Even if loans are available, risk aversion can negatively affect participation. Income-contingent loans (ICLs) provide insurance against adverse labour market outcomes by making repayments dependent on the amount of income earned. In particular, no repayment is typically due when earnings are below a minimum income repayment threshold. Australia was the first country to implement in 1989 an ICL scheme to finance the cost of higher education, and other countries have since adopted similar schemes. These schemes have traditionally relied on general taxation to finance part of the cost of education, and most notably the cost of education of those unable to achieve the minimum income repayment threshold.
In Chapter 8 of “The Mobility of Students and the Highly Skilled: Implications for Education Financing and Economic Policy”, we explore the choice between two types of ICLs: one partly subsidised, often denominated risk-sharing ICL, where the cost of the education of the unsuccessful students falls on the taxpayer; and the other self-financed, often denominated risk-pooling ICL, where the cost of the education of the unsuccessful students falls on the successful graduates of the cohort. Our purpose is to capture the situation faced by governments, such as those in Australia or UK, considering switching from partly subsidised to mostly self-financed funding schemes, while still providing insurance through income contingent repayments.
We consider individuals who are risk-averse and differ in their ability to benefit from education and inherited wealth. We first compare the higher education participation achieved with each scheme. We then show how each individual’s preference over the schemes depends on her ability and wealth and characterise the majority voting outcome. We identify circumstances under which the self-financing ICL is supported by a majority, even if a proportion of those who always study regardless of the scheme in place – precisely those with relatively higher wealth and ability – prefer the subsidised to the self-financed ICL.
Now that we have reached the 50th anniversary of the Robbins report, which paved the way for the mass expansion of the UK higher education system, it is worth examining whether our system of university finance has evolved accordingly.
In terms of finance, we’ve come a long way from the days of Robbins. Back in 1963, the system consisted largely of maintenance grants for poor students. There were none of the tuition fee loans, maintenance loans or bursaries that are such important aspects of today’s system. While we can argue about whether asking students to contribute to their education is a good or bad thing, there’s no doubt about the increasing complexity that the introduction of these aspects of finance has brought. Continue reading →
Here’s the student finance (maintenance loan and grant, and tuition fee loan) application form for 2013:
It’s 34 pages long, with a 10 page section for parents to fill in all their income details…. e.g.
This would be OK for parents used to filling in tax returns etc – but what about those from lower socio-economic groups who are less likely to have to deal with such matters? Does it mean those from poorer backgrounds are put off applying?