Cost-sharing in Israeli higher education: a role for student loans schemes?

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1 Background Cost-sharing in Israeli higher education: a role for student loans schemes? Proposal prepared by Adrian Ziderman, Bar-Ilan University Higher education in Israel, in common with OECD countries, is highly subsidized. About two-thirds of Israeli university funding comes from the central government budget via the Planning and Budgeting Committee of the Higher Education Council; some twenty percent comes from student tuition fees. Student subsidies have been justified, traditionally, by reference to extensive externality benefits derived from university education. Yet in recent years this conventional wisdom has been called into question; the externality argument, while no doubt valid, seems unable to justify the extensive level of student subsidy. In parallel, parsimony in government funding for universities, evidence of high private rates of return to university education investments and rising university costs, all have strengthened the argument for greater cost-sharing in the university sector. In practice, this means the introduction, or raising, of student tuition fees. Because higher tuition fees will cause hardship and, in particular, is likely to impede university access to disadvantaged groups, tuition hikes have been accompanied by the introduction of a state-sponsored student loans scheme in many countries. State intervention is necessary because banks are loath to make commercial loans to students to finance tuition costs and, particularly, living expences, because of the higher risk, lack of collateral and the nebulous nature of the human capital asset that the loan will generate. In this way, student hardship may be avoided; loan repayment is made from enhanced earnings after graduation. Student Loans: International Experience State-sponsored student loans schemes, in place in over forty countries worldwide, are notable for their diversity. Loans schemes may differ in their central objective. Some schemes are aimed at augmenting university funding through facilitating tuition fee increases; others are concentrated on improving the access of the poor, minorities and otherwise disadvantaged groups. Yet others aim at easing student financial burdens (including middle-class students), while some focus on reducing manpower shortages in particular fields. Some schemes have mixed objectives. Identifying the underlying objective of a particular loans scheme is important because this will have important implication for many central aspects of the scheme, including: whether loans are offered for tuition, living expences or both; the appropriate level of loans subsidy (if any); the need for targeting (confining eligibility to particular student categories); loans allocation and rationing procedures where loans funding is limited. There is also considerable difference across schemes in organizational structure and administrative procedures. Some schemes are run by a central government-funded loans agency (as in Hong Kong), which is charged with responsibilities for all aspects of the scheme: loans conditions and loans size, loans allocation to applicants and

2 repayment collection. In other countries, administrative responsibilities for particular aspects of the scheme are assigned to various institutional players. In Thailand, the higher education institutions themselves are responsible for loans allocations and loans repayments are collected by a public bank. In Australian and, more recently in the UK, the tax authorities collect loans repayments; in a small experimental scheme in the Philippines, the universities themselves are responsible for repayment collection. Loans funding is provided by state commercial banks in China and from pension funds in one of the major Korean schemes. Considerable controversy has centred on the question of how repayment obligations should be computed. There is now a sizable theoretical and applied literature on this issue. Most schemes are mortgage-type schemes, in which repayment obligations are fixed and known in advance. A few industrialized counties, including Australia, New Zealand and the UK employ income-contingent repayments, in which the individual's periodical repayment obligations are computed as a percentage of income; collection is entrusted to the income tax authorities. The relative merits of the two approaches differ across countries, with changing institutional environments. This rich mosaic of international practice will be scrutinized, with a view to its applicability to the particular Israel context. Research Objectives The research will review international experience in cost sharing, tuition fee policy and the role of student loans have played in facilitating moves towards a higher and more appropriate regime of tuition fees. The case for and against the introduction of a student loans scheme in Israel would be debated. Assuming that a prima facie case can be made for the introduction of a government-sponsored student loans scheme, how would the loan scheme function in Israel? Reviewing international experience, six particular issues emerge as of central concern: How might the scheme be funded: government, banks, perhaps financial institutions? Mortgage-type versus income-contingent repayment schemes: on balance, which approach is most appropriate in the Israeli context? Loans conditions: loans purpose, loans level (partial or full tuition coast), interest rates, repayment horizon, default sanctions, appropriate subsidy levels Loans distribution: central loans agency, Education ministry or individual tertiary institutions? Loans rationing and access for disadvantaged groups Repayment collection: central loans agency or specialized collection institutions (banks, inland revenue)? All of these issues would be debated in the Israeli context, against the backcloth of international experience on what seems to work well in various contexts. Alternative loan scheme models would be developed for Israel; simulations of alternative loans scheme scenarios would be conducted, to probe their feasibility under different assumptions relating to interest rate subsidies, grace periods, repayment horizons, probable default levels and administration costs. Estimates of the size of individual repayment ratios, loans-scheme recovery ratios and individual repayment burdens (in

3 relation to expected income) would be computed on the basis of alternative assumptions relating to the key elements of the loans scheme. Research Method The initial stages of the work would be devoted to a review of the theoretical and empirical literature on student loans worldwide, with emphasis on OECD country experience; emphasis would be placed on examining the applicability of these findings to the Israeli situation. Some attention would then be directed to the scope for greater cost sharing in Israel, including regimes of differential tuition fees. But the main thrust of the work would be on examining the need for, and the feasibility of, a state-sponsored student loans scheme in Israel. Emphasis would be given to developing a practical, operative model for student loans in Israel. Research Team The subject of student loans is not new to the applicant: he has published a number of studies on student loans and has participated in policy reform dialogues in a number of countries. However this experience has been largely drawn from developing countries, a context which is not always appropriate to the Israeli situation. Since appropriate lessons will need to be learned from OECD experience, the applicant will need to deepen his knowledge of loans schemes in these countries. It is hoped that there will be a partner to this research but, because of time constraints, discussions thus far with colleagues on possible research cooperation have been general and non-committal. Initially the applicant will work on the literature reviews. There is scope for the participation of two graduate students on two specific areas of the research: the first is work on a possible active role for the commercial banks in the loans scheme and particularly in loans funding; the second is the development of loans scheme repayment simulations, under different assumptions regarding interest subsidies, repayment default and administrative costs. Initial Bibliography Chapman, B "Conceptual Issues and the Australian experience with income contingent charges fro higher education". The Economic Journal, Vol. 107 Chapman, B. and C. Ryan, "Income-contingent financing of student charges for higher education: assessing the Australian experience". The Welsh Journal of Education, Vol.11, No.1 Debande, O Student Finance Schemes: A Market Assessment. European Investment Bank Friedman, M Capitalism and Freedom. Chicago: Chicago University Press Greenaway, D. and M. Haynes, "Funding higher education in the UK: the role of fees and loans". The Economic Journal, Vol. 113

4 Johnstone, D. B Sharing the Costs of Higher Education: Student Financial Assistance in the United Kingdom, the Federal Republic of Germany, France Sweden and the United States. New York: College Entrance Examination Board Johnstone, D. B "The applicability of income-contingent loans in developing and transitional countries". Journal of Educational Planning and Administration, Vol. XVIII, No. 2 World Bank Higher Education: The Lessons of Experience. Washington, D.C., The World Bank Ziderman, A Student Loans in Thailand; Are they Effective, Equitable Sustainable? Bangkok: UNESCO, 2003 Ziderman, A and D. Albrecht Financing Universities in Developing Countries, Stanford Series on Education and Public Policy. London: Falmer Press

5 Selected CV: Adrian Ziderman Contact: Homepage: Economics Department, Bar-Ilan University Ramat Gan 52900, Israel Phone: (972) Fax: (972) Personal Details: Born - London, England: Citizen of the UK and of Israel Education: 1959: B.A. in Economics Downing College, Cambridge University, UK 1961: M.A. in Economics Stanford University, U.S.A. 1963: M.A. Cambridge University, UK 1973: Ph.D. in Economics London School of Economics, UK Positions held: Stanford University: Instructor in Economics, The Economist Intelligence Unit, London: Research staff, London School of Economics and Political Science: Research Officer, Higher Education Research Unit, Queen Mary College, University of London: Senior Lecturer in Economics, formerly Lecturer, Bar-Ilan University: Professor, formerly Associate Professor, Department of Economics, from 1975 Director, Economics Research Institute, Head of Economics Department, Sir Isaac Wolfson Chair in Economics & Business Administration, since 2003 The World Bank, Washington, D.C.: Senior Economist, Population and Human Resources, Other activities (selected): Member of the International Advisory Board, International Comparative Higher Education Finance and Accessibility Project, State University of New York at Buffalo (Ford Foundation) Scientific Director, Regional Study on Student Loans in S.E. Asia - Hong Kong, Mainland China, the Philippines, the Republic of Korea and Thailand (UNESCO) Served as advisor: on university reform to Ministry of University Affairs, Thailand and the Ministry of Higher Education, Mozambique; on university scholarship policy, Commission on Higher Education, the Philippines; on university funding reform to the Higher Education Council, Turkey Editor-in-Chief of the interdisciplinary journal International Journal of Manpower

6 Publications in the field of Higher Education: Author of seven books and some seventy papers in the fields of labour economics, economics and finance of education and training, university finance Books and Monographs on Higher Education: The Utilization of Educated Manpower in Industry, London School of Economics and Oliver and Boyd, 1967, (with Mark Blaug and M. H. Peston). North American Edition: Toronto University Press, Financing Universities in Developing Countries, Stanford Series on Education and Public Policy. London: Falmer Press, 1995 (with Douglas Albrecht). Student Loans in Thailand: Effective, Equitable, Sustainable? Bangkok: UNESCO, 2003 Policy Options for Student Loan Schemes: Lessons from Five Asian Case Studies, Paris: International Institute for Educational Planning, UNESCO, 2004 Selected Papers on Higher Education: "The Economic Return on Investment in Higher Education in England and Wales," Economic Trends, May 1971 (with Vera Morris). "Does it Pay to Take a Degree? The Profitability of Private Investment in University Education in Britain," Oxford Economic Papers, July "Do Universities Maintain Common Standards in Awarding First Degrees with Distinction? The Case of Israel," Higher Education, Vol. 14, 1985 (with S. Neuman). Deferred Cost Recovery in Higher Education: Student Loan Programs in Developing Countries, Discussion Paper Series No Washington, DC: The World Bank, November 1991 (with D. Albrecht). Allocation Mechanisms in Higher Education: Financing for Stability, Efficiency and Responsiveness, Discussion Paper Series No Washington, DC: The World Bank, February 1992 (with D. Albrecht). "Student Loans and their Alternatives: Improving the Performance of Deferred Payment Programs," Higher Education Vol. 22 No 3, (July) 1992 (with D. Albrecht). "Cost Recovery for Higher Education: Are Student Loans an Effective Instrument?," World Bank Research Observer, Vol. 8 No. 1, 1993 (with D. Albrecht). "Enhancing the Financial Stability of Universities in Developing Countries," in J. Salmi and A.Verspoor (Editors) Planning Higher Education in Developing Countries, Oxford: Pergamon Press, "National Service: a Form of Societal Cost Recovery for Higher Education," Higher Education, Vol. 29, 1995 (with D. Albrecht). Alternative Objectives of National Student Loans Schemes: Implications for Design, Evaluation and Policy, Welsh Journal of Education, July, 2002 Reprinted in: Peking Educational Review, No. 3, 2004 (Chinese)

7 Financing Student Loans in Thailand: Revolving Fund or Open-ended Commitment?, Economics of Education Review, August Availability for Active Participation in the Project As I will be on sabbatical (in Israel) during the next academic year (2005/06), I will be available to attend the planned Thursday morning meetings, on a regular basis. Adrian Ziderman June 26, 2005