Making Higher Education More Accessible, Sustainable, and Equitable
A different strategic financing model is needed to meet key higher education goals
Countries around the world aim to make their higher education systems more affordable, sustainable, and equitable. Yet few if any have achieved all or even some of these goals. Here we explore why it is so difficult to achieve these key objectives and identify how countries can achieve these goals without spending a large proportion of their economy on higher education.
Let’s first define the objectives. To make higher education affordable requires that the combination of tuition fees and non-repayable aid make it feasible for a broad range of the population to pay the full costs of attendance. Financial sustainability means that the higher education system is on a strong financial footing going forward for providing a quality education. Making higher education equitable requires that disadvantaged groups of students enroll and graduate at rates similar to those gained by more mainstream students.
The Two Predominant Financing Models
Two financing models dominate the global higher education landscape. One is institution-based: tuition is kept low relative to the costs of providing the education. Government pays most of the costs and student financial aid plays a relatively minor role. The other approach is more student-based, in which tuition fees pay for a more significant share of the cost and more financial aid is used to help students pay the rest. Neither of these approaches, though, are well-designed to achieve greater affordability, sustainability, and equity.
Low Tuition. Keeping tuition low is a politically popular approach based on the notion that higher education is a public good and taxpayers should pay the full cost of providing it. By definition, this approach typically achieves broad affordability by charging all students a very low price (although the issue of paying for students’ living expenses is often not fully addressed).
But the reality is that most governments don’t have the resources to provide a quality education if prices to students are kept low. As a result, the supply of seats becomes limited and the higher education system may shrink rather than grow. Or, spending per student is sharply reduced. Neither situation is desirable nor sustainable. And while keeping tuition low is supposed to make higher education more accessible for low-income students, the reality is that poor students are often squeezed out by students from wealthier families who are attracted by the lower prices.
Notable exceptions to this rule are some Scandinavian countries, which, thanks to their high tax revenue base, are able to support low tuition AND provide a quality education for much of their population.
High Tuition/High Aid. By contrast, the more student-based approach (also often referred to as high tuition/high aid) views higher education mostly as a private good, of which students are the primary beneficiaries because of the higher incomes they earn after graduation. Under this philosophy, institutions tend to charge higher tuition and provide more financial aid to those who can’t afford these higher prices.
The high tuition/high aid approach is far more sustainable than a low-tuition approach because it tends to generate more revenue per student. But if the financial aid provided is insufficient, this model leads to sharply reduced affordability, often resulting in a system that mainly serves the well-to-do.
If and when grant aid is insufficient to make higher education affordable, the gap between higher prices and the ability to pay often leads to greater reliance on student loans. Thus, loans become the key mechanism for achieving greater affordability and sustainability in funding higher education.
But too often, program design flaws prevent loans from achieving these twin objectives. For example, weak controls on tuition lead to excessive reliance on loans, resulting in far too many borrowers unable or unwilling to repay. This undercuts the rationale for relying on loans in the first place.
Two Reasons Key Objectives Are Not Met
1)Key Policies Are Not Linked. One reason that the two primary financing models typically do not achieve all three key objectives is that funding, fees and financial policies are not well coordinated. This happens when institutional funding allocations and fee setting policies are principally viewed as ways to maintain or improve the quality of institutions, whereas student aid policies bear most of the burden of maintaining or improving access. As a result, how public funds are distributed to institutions and how student fees are set often work at cross-purposes with student aid policies and programs that are designed to provide greater access to disadvantaged students.
To address these shortcomings, countries should consider moving to a more strategic model of financing higher education that explicitly links policies for funding institutions, charging tuition fees, and providing student aid with overall demographic trends. It is also important that government policies for higher education finance fully take economic trends into account and remain flexible enough to respond to changing economic conditions.
A more strategic model along these lines would reward those institutions committed to addressing areas of high national priority rather than providing the most funding to institutions with the highest cost per student. A strategic model also would have governments establishing funding formulas that reflect the setting of priorities based on national and regional needs.
2) Inability of Governments to Keep Up With Growing Demand. Another reason that the three key goals have proved illusive is that governments in many countries have been unable to keep up with exploding demand for higher education. For most of the history of public higher education in countries across the world, well less than half of the population demanded higher education. As a result, most countries were able to meet demand through a public higher education system that charged little or no tuition fees.
In the past half century, however, demand has escalated around the world to reflect the higher public and private value associated with higher education. To deal with this reality, most developed countries and many developing countries have moved more toward a system of financing higher education that is based on the principle of cost recovery. Under a cost recovery approach, tuition fees are set as a proportion — typically less than half — of the educational cost per student. Most or all of the remaining costs per student are then covered by government funding.
Cost recovery represents a significant improvement over the process it replaced in most countries when government allocations were largely based on the political strength of the institution. Fees were low or zero reflecting the philosophy that higher education is strictly a public good.
One problem with the low or no tuition fee approach, however, is that it fails to reflect the private benefits many college students receive in the form of higher incomes by virtue of their college attendance and graduation. In addition, a minimal tuition fee strategy may result in lower levels of college participation if it is combined with relatively low levels of government support for higher education. Cost recovery addresses these problems by increasing student fees to more nearly reflect the private benefits that students receive and by increasing resources devoted to higher education.
But for all of its advantages, cost recovery creates its own set of problems. For instance, the funding formulas tend to encourage institutions to raise funds privately and build these funds into their expenditure base as a means for increasing the revenues they receive from government. For this reason, cost recovery creates incentives for institutions to increase their costs rather than moderate them. Similarly, setting fees as a percentage of costs per student may encourage institutions to restrict their enrollments — thereby increasing their costs per student. In short, cost recovery can lead to higher costs per student and less access.
Another criticism of cost recovery is that it tends to reinforce the inequities that already exist in a country’s higher education structure. Under cost recovery, institutions with high levels of resources per student tend to receive the most funds, while traditionally under-resourced institutions continue to get shortchanged in the funding process. In that regard, cost recovery is more reactive than strategic in that it accepts financing structures as they are rather than providing strategic direction as to where they should go.
The question of whether the financing structure for higher education is strategic or reactive extends beyond the issue of cost recovery. Most countries tend to be incremental in their approach to financing higher education and thus reinforce the structure that already exists. The distribution of public funds to institutions mirrors previous patterns. As a result, very little strategic planning may occur through the funding process.
A More Strategic Financing Model
The limitations in both the institution-based and student-based approaches for achieving the key objectives of affordability, financial sustainability, and equity leads to the question: Is there a better way to achieve these three goals that could be successfully employed by a broad range of countries? The answer is yes. The details of such a strategy are described below in terms of providing better affordability, sustainability and equity.
Ensuring Broad Affordability. The first step to ensure greater affordability is for countries to move away from the notion that the primary purpose of tuition fees is to pay institutional operating costs. Instead, countries should base tuition on what an average family can afford to pay, and build their institutional budgets from that. For example, governments could allow institutions to set their fees between 10 to 25 percent of GDP per capita. Institutions and programs in the greatest demand could charge a higher percentage than those less in demand. A key corollary of this approach is that government funding must be sufficient to provide grants to cover tuition-related fees and living expenses for students who can’t afford to pay.
One key benefit of this approach is that it results in a certain symmetry. The more institutions charge within the acceptable range, the less government will have to come up with to produce sustainability. At those institutions that charge more, financial aid would need to be augmented because there will be more students unable to afford the higher charges. By contrast, at institutions that charge at the lower end of the acceptable range, the government would have to provide more institutional funding but less student aid.
The key is for countries to set realistic and reasonable limits on tuition as a percent of GDP per capita. Carefully crafted, these policies could lower net funding requirements as the reduction in institutional subsidies would more than offset necessary increases in financial aid. Under such a system, loans would return to their intended role of allowing certain groups of students to invest in themselves at a reasonable cost.
Providing Greater Sustainability. To achieve greater sustainability, countries must develop policies that promote greater relevance to society’s needs, accommodate growth in demand, and achieve greater efficiency.
To ensure greater relevance, the share of funding allocated to training opportunities should be increased. Many countries provide much more funding per student for academic programs than for vocationally-oriented programs, including apprenticeships. Shifting more funding to vocationally-oriented programs would increase relevance of higher education to the economy’s needs as well as help lower spending per student, because vocational training typically costs less per student than academic programs.
To encourage enrollment growth, countries should use government funding to provide more marginal revenue to institutions. In most countries, government funding does not track with enrollment gains, forcing institutions to rely entirely on student-paid fees to cover the marginal costs of any unanticipated enrollment growth. Creating a separate, government-funded fee that is uncapped when enrollments rise above target levels would mean taxpayers would then share in paying for enrollment growth.
To increase efficiency, allocations to institutions should be based on normative costs. Governments or funding bodies typically rely on institutional reports of how much they spend per student to determine the allocation of funds for the future. But institutions often exaggerate what they spend. Costs could be curbed if allocation formulas were based on normative costs — that is, what “ought” to be spent per student in different fields as determined by objective data analysis.
Achieving grater equity. Most countries rely on student financial aid programs to provide greater equity. The fact that chronic inequities persist in most countries is testimony that this approach often does not work well. A key reason that the student aid approach does not produce the desired results is that institutional funding processes often work against producing greater equity, thereby making the job of student aid that much harder. Moreover, student aid policies and funding are insufficient to offset fully the imbedded inequities in society.
To achieve greater equity, what is needed are financial aid policies that are better designed to meet the needs of the most disadvantaged students rather than spread these benefits more broadly to achieve political purposes. What is also needed are policies that provide institutions with incentives to enroll more low income and minority students. These incentives should also apply to encourage institutions to graduate more students from these traditionally underrepresented groups.
Better Targeting of Student Aid Benefits. Looking across the globe, there is a tendency for student aid programs to go to students from a broader range of family incomes as a way to make sure there is political support for these programs. But this broadening of eligibility reduces the effectiveness of student aid programs to improve opportunities for the most disadvantaged students. Thus it is important for policymakers to resist the political temptation as much as possible to broaden eligibility to help ensure that the student aid funds have the maximum impact on targeted groups of students.
Institutional Equity Incentives. The amount of funding devoted to student aid in most countries is not sufficient to convince institutional officials to take the necessary steps to make higher education more equitable. Put anther way, the reality is that middle class students who can pay all or most of the sticker price are typically more attractive to institutions to enroll than economically disadvantaged students who bring student aid to the table.
To correct this typical imbalance it may be necessary to pay institutions to enroll higher numbers of disadvantaged students. Ideally, this should be done by establishing a program that pays institutions more for the disadvantaged students they enroll than students from more mainstream families.
Incentives for Completion. It is also the case that the funding process in most countries tends to favor enrollment over completion. But completion rates of low-income and minority students lag behind the rate of wealthier students. One way to offset this tendency is to allocate some funds to institutions based on how many disadvantaged students they enroll and graduate.
* * *
The steps listed above would constitute a much more strategic approach to the financing of higher education than the systems currently in place in most countries and hold the potential of enhancing the ability of countries to provide greater affordability, sustainability and equity.
Arthur M. Hauptman is an independent public policy consultant specializing in higher education finance issues. He can be reached at Art.Hauptman@yahoo.com.
