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An investigation of education finance reform; graduate taxes and income contingent loans in the Netherlands

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  • Bas Jacobs

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Abstract

In this paper we analyse the consequences of replacing government subsidies with a graduate tax (GT) or income contingent loan (ICL) system for the financing of higher education. Both these systems are directed towards solving capital and insurance market failures.

We constructed an empirically based simulation model to analyse loans, GT's and ICL systems of education finance. We considered various financing regimes that differ in: i) the extent to which non-repayment or default risks are pooled or shifted towards society; and ii) the level of education subsidies.

We show that the switch to a GT or ICL system can significantly reduce the income risks that graduates would experience under an artificially constructed loan system. A reduction in government outlays of about 2.5 billion euro would result if education subsidies are dropped to zero. The tax rate in a GT would then have to be about 6% on average. In an ICL system with full risk pooling the repayment rate would be higher, ranging from 10% - 6%, depending on the size of the default/solidarity premium on the interest rate.

If default risks are shifted to society the repayment rate may be lower, but this goes at a cost of a smaller reduction in government outlays. Under a risk-shifting regime, the government encounters diminishing savings on outlays because reducing ex ante subsidies on education subsidies, increases the costs of default (ex post subsidies). Replacing ex ante subsidies with ex post subsidies makes the resulting distribution of incomes more equal because only those with low life-time incomes benefit from ex post subsidies. We discuss behavioural responses and policy implications.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 9.

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Date of creation: Jul 2002
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Handle: RePEc:cpb:discus:9

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Cited by:
  1. Vincent, VANDENBERGHE & Olivier, DEBANDE, 2005. "Paying after Graduation. An Empirical assessment of loans wit Income Forgiveness and Human Capital Contracts," Discussion Papers (ECON - Département des Sciences Economiques) 2005003, Université catholique de Louvain, Département des Sciences Economiques.
  2. Darragh Flannery & Cathal O’Donoghue, 2011. "The Life-cycle Impact of Alternative Higher Education Finance Systems in Ireland," The Economic and Social Review, Economic and Social Studies, vol. 42(3), pages 237–270.
  3. Courtioux, Pierre, 2008. "How Income Contingent Loans could affect Return to Higher Education: a microsimulation of the French Case," MPRA Paper 14246, University Library of Munich, Germany.
  4. Vincent, VANDENBERGHE & Olivier, DEBANDE, 2004. "Financing Higher Education with Students Loans - The crucial role of income-contingency and risk pooling," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004036, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  5. Bas Jacobs & Sweder J. G. van Wijnbergen, 2007. "Capital-Market Failure, Adverse Selection, and Equity Financing of Higher Education," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(1), pages 1-32, March.
  6. Vincent, VANDENBERGHE, 2005. "Free Higher Education - Regressive Transfer or Implicit Loan ?," Discussion Papers (ECON - Département des Sciences Economiques) 2005031, Université catholique de Louvain, Département des Sciences Economiques.
  7. Rita Asplund & Oussama Ben-Abdelkarim & Ali Skalli, 2007. "An Equity Perspective on Access to, Enrolment in and Finance of Tertiary Education," Discussion Papers 1098, The Research Institute of the Finnish Economy.
  8. Dirk Schindler & Benjamin Weigert, 2008. "Educational and Wage Risk: Social Insurance vs. Quality of Education," CESifo Working Paper Series 2513, CESifo Group Munich.
  9. O Debande & Vincent Vandenberghe, 2007. "Refinancing Europe’s Higher Education through Deferred and Income-Contingent Fees: An empirical assessment using Belgian, German and UK data," CASE Papers case124, Centre for Analysis of Social Exclusion, LSE.

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