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An investigation of education finance reform: Graduate taxes and income contingent loans in the Netherlands

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Author Info
Bas Jacobs

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Abstract

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 Papers with number 9.

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Related research
Keywords: education; finance; subsidies; graduate taxes; tax; income contingent loans; government expenditures;

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Find related papers by JEL classification:
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
H82 - Public Economics - - Miscellaneous Issues - - - Governmental Property
I22 - Health, Education, and Welfare - - Education - - - Educational Finance
I28 - Health, Education, and Welfare - - Education - - - Government Policy

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bas Jacobs & Sweder J.G. van Wijnbergen, 2005. "Capital Market Failure, Adverse Selection and Equity Financing of Higher Education," Tinbergen Institute Discussion Papers 05-037/3, Tinbergen Institute. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!]
  3. 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. [Downloadable!]
  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). [Downloadable!]
  5. 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 /124, Centre for Analysis of Social Exclusion, LSE. [Downloadable!]
  6. 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. [Downloadable!]
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