Tuition Subsidies and Tertiary Education Participation: Evidence from a System with Deferred Costs

This paper examines the impact of tuition subsidies on tertiary education outcomes in a setting where financial barriers are already substantially reduced. We study the introduction of New Zealand’s Fees-Free policy, which eliminated first-year tuition fees, in a system where tuition is financed through widely accessible student loans that require no upfront payment and are interest-free for borrowers who remain in the country, and where means-tested allowances provide non-repayable support toward living costs for some students. Using administrative data and a cohort-based empirical strategy, we estimate effects on participation, retention, and completion. We find little evidence that the policy increased participation or improved progression outcomes, and socioeconomic gaps in participation do not narrow. These findings are consistent with a setting in which tuition costs are not the primary constraint on tertiary enrolment. Instead, opportunity costs and prior academic preparation appear more important in shaping participation decisions. Our results identify a boundary condition for the effectiveness of tuition subsidies: in systems where upfront costs are deferred and borrowing costs are low, tuition subsidies primarily reduce future student debt rather than altering constraints at the point of enrolment, and may therefore have limited effects on access and may not improve, and may even worsen, equity, with implications for the cost-effectiveness of universal tuition subsidies in such settings.