A Policy of Full State Financing of Students in the UK - Essay Example

SHOULD THE UK GOVERNMENT RETURN TO A POLICY OF FULL FINANCING MAINTENANCE AND TUITION FEES IF NOT, WHAT ALTERNATIVE MODELS OF HIGHEREDUCATION FUNDING WOULD YOU FAVOUR AND WHY In a rapidly-changing and progressively competitive world, the task of higher education in endowing the labour force with relevant and suitable skills, in encouraging innovation, fostering productivity and in enhancing the quality of life is extremely vital and imperative. The research involved in such undertaking drives the cutting edge of human knowledge and serves as the foundation of human progress. The wisdom it imparts educates a nation in a knowledge-dominated age and gives its graduates personal and intellectual fulfillment The benefits of a good higher education system are extensive that the risk of decline is considered utterly unacceptable Background In recent years, education, specifically higher education, stood as one of the most contentious topics of discussion in public policy forums and government policymaking in the UK. As witnessed, several academic changes have been instigated, others have remained pending, and in some quarters, significant reform packages have been put forward, on the drawing board ready for deliberations or are presently being deliberated upon. In the UK and in other countries of the world, higher education is confronted with three problems - universities are inadequately funded, escalating apprehensions about quality, the dearth of student support, proportion of students coming from underprivileged environments is deplorably insignificant and the financing of universities is in the state of collapse since money is sourced from general taxation, however, the beneficiaries are those coming from more affluent conditions (Barr, 2003, p.371). The plan to restructure higher education (HE) funding has caused so much controversy. Much of the wrangling has been centered on what the reforms will mean for those students coming from different family income backgrounds and the level of liabilities they will shoulder in their higher education experience. Likewise, apprehensions have been brought up on how the graduates will be affected by these debt repayments all through their working lives, as well as whether or not the funds raised will significantly improve the condition and circumstances of universities (Dearden, Fitzsimons & Goodman, 2004, p. 5) Brief Statistics At present, there are 168 higher education institutions in the UK, of which 90 are universities. In the years 2002-2003, enrollees reached up to 2.2 million in UK universities and colleges. In England, the participation rate for 18-30 year olds in higher education was 44%. In the same period, there were 184,700 international students studying in the UK, as well as 90,600 from the EU. Universities employ more than 300,000 staff; 1.8% of the total UK labour force. UK's higher education generates an annual 4 billion in foreign earnings and education and training exports are worth 10.2 billion. Public funding of higher education per student dropped by 37% between 1989 and 2002. During the same period student numbers grew by 94%. Source: Universities UK, Manifesto, General Election, 2005 A Quick Look at the Proposals January 27, 2004 saw the endorsement of the Higher Education Bill by the MPs which aimed to eradicate tuition fees for students and institute variable fees of up to 3,000/year from years 2006-07. In this plan, graduates will be allowed a sponsored Graduate Contribution Scheme or GCS loan equal to the value of their fees. Likewise, graduates from 2009 will put in 9% of earnings over and above 13,925 every year to pay off the loan. In line with inflation, the outstanding value of the loan will expectedly increase each year, with any amount left unsettled after twenty-five years being cancelled. Another scheme calls for students of underprivileged backgrounds to receive financial support of at least 300/year if full top-up fees will be charged by the institution. With the most recent proposals, students coming from families with incomes of up to 33,630 will get a means-tested grant of up to 2,700/year. And for those living away from home or outside London, they will be entitled to a loan of at least 3,300 to help cover living expenses. These existing strategies - which embrace the compromise introduced in January 2004 - are at variance with those contained in the White Paper that was made available in January 2003 mainly in the benevolence of the financial backing given to students while in college, and in particular to those belonging to deprived settings. Graduates will need to begin paying back their loans at lower incomes than with the original proposals, but the debts of those who will stay on low incomes for a long time after finishing college will in due course be written off. The biggest government-subsidised credit that students with parents on an income of up to 26,000 could incur for a three-year course staying away from home or outside London would be 19,335 in 2006-07 prices. The prospective debt then could grow to a maximum of 21,885 for students with parents' whose income is 33,630/year. Consequently, the debt decreases gradually to 18,665 for students with parents on incomes of about 44,000 (Dearden, Fitzsimons & Goodman, 2004, pp. 1-2). Source: Department for Education and Skills 2003, 2004a, 2004b, 2004c extracted from Dearden, Fitzsimons & Goodman's "An Analysis of the Higher Education Reforms," Briefing Note #45 Position, Justification and Suggested Model of Financing NO TO HIGHER EDUCATION'S FULL STATE FINANCING POLICY; STUDENTS SHOULD MAKE FINANCIAL INPUT TO THEIR HIGHER EDUCATION STUDY. For several countries in Europe, the conventional method to supporting and fostering higher education is through public financing. Insistence to change or alter present funding accommodations through diverse cost-sharing mechanisms between students and taxpayers are all because of the need to expand and improve the systems of higher education, this is in part a reflection of the increasing demand for skilled workers as a consequence of technological and demographic progressions (Johnstone, 2004) and to the growing competition for limited public funds between public policies. Correspondingly, the rising mobility developments of students and graduates create problems with the probable risk of underinvestment by some regimes (Teichler & Jahr, 2001). Intra-European fiscal competitions, in an environment of greater mobility of graduates and rising competition between higher education institutions, will lead to a diminution of their efficient taxation rate, which will result in a reduction of their implicit contribution to higher education finance. Therefore, there exists a need to pay back these predetermined tax proceeds by overt contributions (Bhagwati & Wilson, 1989). Also, contentions in favour of increasing individual participation is directly associated with the application of the "benefit principle." Practical substantiations infer that the private benefits (e.g. higher income, lower risk of unemployment) from higher education are significantly numerous (Johnes, 1993), and presumably increasing due to an escalating need for skills encouraged by skill-based technological progress (Kremer, 1994). Better health and personal fulfillment are supplementary private benefits gained by those with higher education qualifications. It is certifiably true that higher education produces benefits and advantages to society aside from those endowed to the individual - benefits like growth, social solidity, the circulation and dissemination of values, and the development of knowledge. These lines of reasoning infer that taxpayer subsidies to higher education must be a stable and enduring aspect of the scenario. However, there is tremendous proof that those students acquire considerable private benefit from their degrees; therefore, it is reasonable and equitable that they should shoulder some of the costs. Thus, it is imperative that the mechanism that will be employed to support students is prudently and meticulously designed. Income Contingent Loans In a series of articles, Barr (1997) and Barr and Crawford (1998) established the components, and technicalities for, a loan procedure that could generate additional resource, enhance access and steer clear of the revenue leakages recognised by Albrecht and Ziderman (1993). The plan is devised with three goals in mind - for those who do not want up-front payments, this can guarantee that education can remain free at the time of utilization; that all loans would be fully income-dependent, instead of mortgage-based; and to the fullest extent possible, would be drawn from non-public sources. The first two will make certain that this credit method will assist and pave the way for smooth access since up-front charges are being stayed away from and repayments are just an insignificant proportion of startup income; For students signing up at British universities after 1998, income contingency is applicable and students become liable for repayment of maintenance loans as soon as their gross income exceeds 10,000 annually. Further, graduates pay 9% of their subsidiary earnings, collected by the Inland Revenue and passed on to the Student Loans Company (SLC). This method of collection itinerary is secure and minimises the probability of debt default which evidently makes for a cost effective collection process. Since the scheme is income contingent, graduates begin to make repayments at relatively low levels of income and, unlike a graduate tax, only repay what has been borrowed, plus interest charges. This theory has already been acknowledged in the UK since two trenches of debt under the old mortgage scheme have been sold by the SLC. Collection via the Inland Revenue makes the debt more attractive to the private sector and its appeal would be further improved if graduates paid a positive real interest rate on loans, largely equal to the government's borrowing rate. Under existing measures, students pay an interest charge that adjusts only for RPI. Since the real interest rate is around 3% per annum, this corresponds to a considerable subsidy from the taxpayer, which is arbitrary rather than targeted. If loans were secured, the prospect of an instantaneous and extensive infusion of private funds is huge. Annual SLC lending is now 1 billion. Barr and Falkingham (1993) gauged that the private sector would be willing to pay 800 million for this, (e.g. face value less expected deferment and default). That is fresh private money which saves the taxpayer an equivalent sum per year. A scheme which contained income support plus differentiated tuition fees at the levels just mentioned could have a face value of 2.6 to 5 billion per annum depending upon fee levels, with a market value of 2.1 to 4 billion annually. At the bottom, roughly three quarters would accumulate as Treasury savings and one quarter as new resource to universities; at the top end, around half would accrue to government and half to universities. Therefore, 2 billion could be available to government for more efficient targeted expenditure (e.g. in the form of needs based scholarships) and 2 billion to universities. On the grounds of fair play and efficacy, the case for income contingent loans covering fees as well as maintenance, collected through the Inland Revenue and fully securitised, is convincing. The only authentic obstacle to execution is the shades of public sector accounting. If repayments are collected via the Inland Revenue, it can be disputed that risk is moved to the private sector when the loan book is securitised and therefore all lending to students has to count against the current public sector cash requirement. This could indeed be an obstruction to earning supplemental private resources rapidly. Barr (1997), nevertheless, provides an array of pragmatic responses to this problem involving some combination of revising public sector accounting arrangements and/or further privatising the organisation and finance of student loans (Greenaway and Haynes, 2003, pp. 162-164). Another way to elucidate the scheme is through what Chapman has explicated. For him, if it things are transmuted into public policy measure, an effortless technique to raise private contribution is to increase fees. However, for reasons of efficacy and fair play associated with capacity to pay, it is contended that higher education should be free at the point of use and payment (Chapman, 1997). A specific point backing up deferred payment is the concept of lopsidedly dispersed liquidity constraints and the time lag between the investment decision and the materialisation of the associated benefits. The cases for deferred payments also lie on a moral foundation. Private contributions must function with the student's ability to pay in mind. However, students' income is not determined at the time of the investment, as it principally rely their future income or earnings. Consequently, enforcing the ability to pay principle (in combination with the benefit principle) requires deferring its implementation at a time when the resulting income of the student will become verifiable, through income-contingent scheme. Basically, income-contingency is attractive and advantageous due to information and uncertainty problems that need to be properly addressed. An individual borrowing to acquire human capital and facing lower earnings than expected does not have the option to sell his degree on a secondary market. This increases the exposure to risk and the propensity of private investors to deny access to capital or charge high risk. Furthermore, future students - particularly those coming from very low socio-economic backgrounds - are not necessary aware of the extent or degree of the return on human capital investment. Even well-informed students face risk -- though average private rate of return to investment is fairly high, there is significant difference about that average. Income-contingency operates as an insurance against loss of earnings, but encourages cost than need to be shared within the cohort of graduates (risk pooling) or transferred to taxpayers (risk shifting). Risk pooling is a system where the cost of default is shared among graduates. But the higher cost of providing income-contingency to categories like women or less profitable fields of study could be shifted to the taxpayer via subsidies to individuals (borrowers) or investors (lenders). This would be a simple way of mitigating adverse selection problems. Regarding potential private deferred and income-contingent payment solutions, a distinction should be introduced between loan and equity contracts (Jacobs, 2002). Income-contingent loan is based on the promise to pay back a fixed amount contingent on the additional revenue generated by investing in higher education. In the case of equity contracts, it corresponds to the notion of human capital contract (HCC) in which students commit part of their future income for a predetermined period of time in exchange for capital (Palacios, 2004). Income-contingency is direct in the case of human capital contracts (HCC), as payment is defined as a percentage of earnings. For income-contingent loans (ICL), private contribution is proportional to the benefits derived from the additional human capital acquired at higher education level. Higher education graduates would pay only if their annual net income is above that of individuals with secondary school attainment. The suggested scheme will certainly usher in an extensive and prudent access to higher education, an endeavor that makes for a more free-thinking, progressive and a socially impartial humane society. REFERENCES Albrecht, D. & Ziderman, A. (1993). "Student loans: An effective instrument for cost recovery in higher education' World Bank Research Observer, 8, pp. 71-90. Bhagwati, J.N. & Wilson, J.D. Ed. (1989). Income taxation and international mobility. Cambridge, MA: MIT Press Barr, N. (1997). "Student loans: Towards a new public/private mix." Public Money and Management, 7, pp. 31-40. Barr, N. & Crawford, I. (1998). "Funding higher education in an age of expansion." Education Economics, 6, pp. 45-70. Barr, N. (2003). Financing higher education: Lessons from the UK debate. Oxford, UK: Blackwell Publishing Barr, N. & Falkingham, J. (1993). "Paying for Learning." Welfare State Programme, Discussion Paper WSP/94, London School of Economics. Barro, R. (1998). The determinants of economic growth. Cambridge, MA: MIT Press. Barro, R. & Sala-i-Martin, X. (1995). Economic growth. New York: McGraw-Hill. Bynner, J. & Egerton, M. (2000). The social benefits of higher education: Insights using longitudinal data. London: Centre for Longitudinal Studies, Institute of Education Bassanini, S. & Scarpenta, S. (2001). "Does human capital matter for growth in OECD countries Evidence from pooled mean-group estimates." OECD Economics Department Working Papers, no. 282, Paris. Chapman, B. (1997). "Conceptual issues and the Australian experience with income contingent charges for higher education. The Economic Journal, 107, (442, pp. 738-751. Dearden, L., Fitzsimons, E & Goodman, A. (2004). "An analysis of the higher education reforms." The Institute for Fiscal Studies. Briefing Note #45 Gemmell, N. (1997). "Externalities to higher education: A review of the new growth literature." Report 8, National Committee of Inquiry into Higher Education. Greenaway, D. & Haynes, M. (2003). "Funding for higher education in the UK: The role of fees and loans. The Economic Journal, 113 Jacobs, B. (2002). "An investigation of education finance reform - Graduate taxes and income contingent loans in the Netherlands, CPB Discussion Paper. Johnes, G. (1993). The economics of education. London: The MacMillan Press Johnstone, B. (2004). "The economics and politics of cost sharing in higher education: Comparative perspectives. Economics of Education Review, 23, pp. 403-410 Kremer, M. (1993). The O-Ring theory of economic development. The Quarterly Journal of Economics, 108, 3, pp. 551-75. McMahon, W. W. (2000). Education and development: Measuring the social benefits. Oxford: Oxford University Press. Palacios, M. (2004). Investing in human capital: A capital markets approach to student funding. Cambridge: Cambridge University Press Steel, J. & Sausman, C. (1997). "The contribution of graduates to the economy: Rates of return." Report 7, The National Committee of Inquiry into Higher Education. Teichler, U. & Jahr V. (2001). "Mobility during the course of study and after graduation." European Journal of Education, 36, 4, pp. 443-458. Read More