Needed: Financing Policies That are Both Affordable AND Sustainable

There is a way to make higher education affordable and sustainable without devoting a high percentage of GDP to higher education

In countries around the world, a key objective in financing public higher education is to make it affordable to a broad range of the population. Another key objective is to make the system financially sustainable.

The reality, though, is that higher education systems in few countries are both financially sustainable and affordable for a broad range of their population. Here we ask whether a financing model exists that meets both objectives without devoting a large share of their GDP to higher education.

The Two Predominant Financing Models

To reach a consensus on what might work, it is important first to understand the two predominant financing approaches for public higher education.

One is an institution-based philosophy in which tuition is kept low relative to the costs of providing the education. In this model, government pays the bulk of the costs of education and student financial aid plays a relative minor role. The other approach is a more student-based model, in which tuition fees pay for a significant share of the costs and financial aid is used aggressively to help students meet the higher fees and living expenses.

Keeping Tuition Low. The politically popular approach of keeping tuition low flows from 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 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 are kept low. As a result, the supply of seats is limited and the higher education system is not sustainable for a broad range of the population. Or, spending per student is sharply reduced in a mass system. Notable exceptions are some Scandinavian countries, which, thanks to their high tax revenue base, are able to support low tuition AND provide a quality education for a broad share of their population.

High Tuition/High Aid. By contrast, the student-based approach (also often referred to as high tuition/high aid) views higher education mostly as a private good and believes students are the primary beneficiaries because of the higher incomes they earn after they graduate. Under this philosophy institutions tend to charge higher tuition and also provide more financial aid to help ensure greater equity in who is able to go to college.

The high tuition/high aid approach is far more sustainable than a low-tuition approach because it tends to generate more resources per student. But if the additional financial aid provided is insufficient to help students and their families who lack adequate resources to cover the higher prices, this approach leads to sharply reduced affordability.

The gap between higher prices and the ability of many students to pay them often leads to greater reliance on student loans to fill the gap. This accounts for why loans increasingly are integral part of the higher-education financing equation. To spread the costs in a socially acceptable manner, sometimes these loans are repaid based on borrowers’ incomes after they graduate

Thus, loans in theory represent a key mechanism for achieving greater affordability and sustainability in higher education funding. But too often, flaws in program design prevent loans from achieving these joint objectives. For example, weak controls on prices lead to excessive reliance on loans.

The result is an unacceptably high level of borrowers unable or unwilling to meet their repayment obligations, which undercuts the foundation for relying on loans in the first place. In addition, loans unfortunately are sometimes relied upon more than grants to help students to help students whose families lack the resources to pay the living costs associated with going to college.

Towards A Consensus Model

There are also problems that limit the ability of both models to achieve the key objectives of affordability and sustainability. One is that funding, fee setting and financial aid decisions are often not well coordinated which results in reduced effectiveness. Another is that the challenges of helping students pay for their living expenses are not adequately addressed.

These various limitations in both the institution-based and student-based approaches to affordability and financial sustainability leads to the question: Is there a better way to achieve these two objectives that could be successfully employed by a broad range of countries?

Ensuring Affordability. A key first step in ensuring greater affordability requires abandoning the notion that the primary function of tuition fees is to help pay institutional costs. Instead, countries should adopt a philosophy in which tuition is based on what the average family can afford to pay. For example, institutions could set their tuition and mandatory fees between 10 to 25 percent of GDP per capita. Under this approach, institutions and programs in greatest demand could charge a higher percentage of GDP per capita than those not in high demand. A key corollary of this approach is that funding of grants or institutional discounts must be sufficient to cover tuition and living expenses for students who come from families with below average resources.

This approach results in a certain symmetry. The more institutions can charge, the less their countries will need to fund them. For institutions charging near the top of the range, countries would have to augment financial aid because there will be more students without the resources to pay. By contrast, for institutions that set their charges at the lower end of the acceptable range, the government would need 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 and to be prepared to “claw back” a portion of the tuition collected above the base so that incentives for institutions to raise prices are reduced. 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 price.

Providing Greater Sustainability. In addition to affordability, countries should seek to achieve greater sustainability by developing policies that: promote 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. In many countries, funding of academic programs is disproportionately higher than funding for vocationally-oriented programs including apprenticeships. Shifting more funding to vocationally-oriented programs could increase relevance to the economy’s needs. It could also help lower spending per student as training typically costs less than academic programs.

To encourage enrollment growth, countries should use government-paid fees to provide more marginal revenue to institutions. In most countries, institutions are discouraged from expanding beyond target enrollment levels because government funding does not track with enrollment gains and they must rely on student-paid fees to cover the marginal costs of any unplanned enrollment growth. Creating a separate government-funded fee that is uncapped with regard to resident student enrollments would mean taxpayers would share in paying for enrollment growth.

To increase efficiency, allocations to institutions should be based on normative costs. Most countries rely on institutions’ reports of how much they spent to determine the allocation of funds for the future. The problem is that colleges and universities tend to exaggerate what they spend per student in reporting to governments. Costs could be curbed if allocation formulas were based instead on normative costs — what “ought” to be spent per student in different fields as determined by objective analysis of the data.

All of these steps taken together would help in making financing systems both more affordable and financially sustainable. As a result, having such a consensus model is a worthy and achievable goal for many countries.