The Government must choose from three schemes. The ICL loan, whereby graduates only pay once they’re earning a minimum amount, has generated most debate, say Darragh Flannery and John Cullinan
THE Cassells report outlined three options for funding higher education. The first two involve increased state funding, but one will scrap the student-contribution fee and the other will maintain it at current levels.
The third is an income-contingent loan (ICL) system. Graduates borrow from the State to pay for their education, but do not make any repayments until they are working at a certain income threshold.
It is unclear which is the preferred option of the Government, but the loan scheme has generated a great deal of debate, not all of it fully informed. Given the mixed information, it is important to clarify a number of issues.
A loan system implies that some students might not pay back any of the debt they owe. For example, if somebody leaves third-level education and chooses not to work for the rest of their life, they repay nothing.
A key point about this system is that higher education is free at point of use. So, instead of paying €3,000 every September for four years, the students have no up-front tuition costs. One common misconception is that a loan scheme is similar to a home-mortgage loan. However, the crucial difference is that if the individual makes no repayments due to unemployment, say, nothing is repossessed and there is no impact on future credit-worthiness.
Mindful of potential hardship for graduates, the repayment burdens within an ICL scheme are generally capped. In other words, the proportion of an individual’s net monthly income used to service the debt has a limit. In countries where ICLs have been introduced, such as Australia, New Zealand, and England, the maximum repayment burdens are 8%, 10%, and 9% of income per period, respectively.
Another common argument is that a loan scheme would drastically worsen the underrepresentation of students from lower social classes.
The latest research from England and Australia shows that the proportion of new entrants from the lowest socio-economic groups has not changed since the introduction of, or subsequent reform to, their ICL schemes.
Partly, this is because socio-economic gradients in higher-education participation are formed well before a student sits their end-of-secondary-education exams.
Other funding models have also been suggested. For example, countries such as Sweden, Germany, and Denmark provide full State funding for third-level education, meaning taxpayers subsidise 100% of tuition costs.
From an equity perspective, this may seem attractive. However, funding higher education fully through the taxpayer can be regressive. For instance, a large proportion of the funding burden may fall on those who derive little direct benefit from third-level education.
Furthermore, without addressing the persistent underrepresentation of lower social classes in third-level education, the benefits of higher education to higher life-cycle incomes will mainly accrue to those who are already better-off. As a result, public funding of higher education, through a free-fees scheme, can be a mechanism for people on lower incomes to subsidise the better-off to participate in higher education.
Another alternative is a voucher system, whereby individuals receive a fixed coupon amount. This can be used in any third-level education institution.
Such a scheme was introduced in Colorado in 2004, but it has achieved none of its aims and actually reduced access to higher education for those in lower socio-economic groups.
The UK-based Higher Education Policy Institute (HEPI) has also highlighted concerns about this scheme. If the State fixes the value of the voucher, without limits to the number of students that can attend higher education, this represents an unrestricted financial commitment. That’s a worry.
The State could avoid this by limiting the number of students or limiting the number of vouchers. However, this would defeat the key aims of the system. Concerns like this led HEPI to conclude “the problems to which vouchers would give rise are such as to render them an unattractive and unacceptable basis for funding universities”.
But a loan scheme is also not without its flaws. For instance, the revenue generated is deferred, whereas the costs to the State are immediate. And would emigration affect the collection of revenue? The recent economic crisis affected young people disproportionally. Burdening them with a substantial amount of debt, as they leave higher education, could be unfair.
However, these obstacles can be significantly mitigated by choosing the correct parameters within an ICL scheme. The system, while not perfect, can provide adequate finance to the higher-education system and provide more equal access to all, if designed in a sensible manner.
It is crucial that any debate around this sensitive issue is done without the confusion of misconception.
Dr Darragh Flannery, lecturer in economics, Kemmy Business School, University of Limerick; Dr. John Cullinan, lecturer in Economics, JE Cairnes School of Business & Economics, National University of Ireland, Galway
© Irish Examiner Ltd. All rights reserved