Who pays for universities: taxpayers or students?

by Dirk Van Damme
Head of the Innovation and Measuring Division, Directorate for Education and Skills

There are few issues in education that raise as much political and ideological controversy as tuition fees for higher education. Across many countries a broad consensus has developed that public education in the age of compulsory schooling should be free of charge. Even Adam Smith considered free public education for the young as a central obligation of the state, for which the cost should be shared through taxes. But the question of how to distribute the financial cost of education beyond the age of compulsory schooling – for early childhood education, adult education and training and/or, especially, higher education – has kindled heated debates in recent years, particularly as national budgets shrink and the cost of high-quality education balloons.

Education at a Glance has documented the shift towards greater private funding of higher education in many countries over the past years. The rationale for this shift is the continuously high and even increasing financial returns that a higher education degree generates over a lifetime. Higher education could thus be considered a private investment for which individuals should bear most of the cost. Funding higher education with taxpayers’ money risks a reverse redistribution of social wealth from the poor to the rich, thus aggravating, rather than reducing, social inequality. The state’s responsibility is to design a framework for equitable and transparent funding regimes that also ensures access for students from poorer families through financial support systems of grants and scholarships. These arguments have convinced increasing numbers of governments to shift the burden of financing higher education to students and families.

Yet some countries maintain a welfare state-oriented social contract for higher education, where the cost of universities, like the cost of other social, cultural and educational services, is paid through progressive taxation. The private financial return on a higher education degree is largely skimmed off, through high and progressive income taxes, to become a high public return on the state’s investment. Open access and high enrolment rates prevent the system from working to the advantage of only a small part of the population. However, this model only works in a political system where high income taxes to support general social and educational services are widely accepted.

These divergent views are reflected in the huge differences in the amount that students and families have to pay for a year of university education. The most recent Education Indicators in Focus provides new data on tuition fees. The chart above presents the average annual tuition fees in a range of countries with comparable data. The chart clearly shows that the private cost of higher education, in the form of tuition fees, differs widely among countries. Obviously, within each country tuition fees for individual institutions can also vary; but the national average gives a good idea of the general approach and political preferences of a country.

On the top are countries where the cost is highly privatised; on the bottom are countries where higher education is funded through taxation, hence with no or limited tuition fees. The group on the top includes liberal market economies in the English-speaking world and Asian market economies, but also emerging economies with expanding higher education systems, such as Colombia. The group on the bottom is mainly composed of Nordic welfare states and some transition economies. In the middle section are countries that adhere to a mixture of both ideological positions.

Each model has strengths and weaknesses, not to mention technical challenges. Countries where the cost is privatised need to develop fair and transparent ways to set tuition fees. For example, tuition could be related to field of study and, ultimately, future earnings. These countries also need to determine conditions for loan systems and their income-contingent and means-tested repayment schemes. And above all, they need to secure equitable access to higher education through student support and financial aid schemes. If these policy conditions are met, these systems seem to be able to secure sustainable funding for universities.

Countries with a welfare-state model of funding higher education see participation in higher education as a right to which all capable students are entitled. The high long-term social and economic public returns – generally much higher than the direct costs for the state – ensure that the upfront investments in higher education pay themselves back in higher incomes taxes and lower social security expenses. The main challenge for such countries is to assume the fiscal consequences. Shrinking state budgets and growing resistance to high levels of taxation in such countries might result in dwindling funding for higher education – and for university-based research and innovation that fuels the knowledge economy.

But the most serious risks are for the countries in the middle section of the chart, those that don’t seem to be able to make a clear policy choice.  They might combine the risks of the two models but without enjoying their benefits, leading to a deadlock on both the public and the private side of the funding mix. In these countries, universities pay the price of political indecisiveness.

Ideologies always claim absolute validity of their arguments. Yet in policy making the challenge is to find the smartest approach that yields the best outcomes the most efficiently. What 21st-century knowledge economies need is a system of higher education that generates globally competitive research and innovation and provides high-quality education that is accessible to all talented students. This doesn’t come cheap, and countries have to assume the cost, whether through public and/or private funding. But the long-term price of underfunding higher education is much higher than the short-term cost to both taxpayers and students. An inability to make a clear policy choice seems to be the costliest (non-)choice of all.

How much do tertiary students pay and what public support do they receive? Education Indicators in Focus, issue No. 41, by Eric Charbonnier
Combien les étudiants paient-ils et de quelles aides publiques bénéficient-ils ? Les indicateurs de l’éducation à la loupe, issue No. 41 (French Version)
Education at a Glance 2015: OECD Indicators
Chart source: OECD (2015), Education at a Glance 2015: OECD Indicators, OECD Publishing, Paris, http://dx.doi.org/10.1787/eag-2015-en, Table B5.1.

Leave a Reply