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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

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. 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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  • Bas Jacobs, 2002. "An investigation of education finance reform; graduate taxes and income contingent loans in the Netherlands," CPB Discussion Paper 9, CPB Netherlands Bureau for Economic Policy Analysis.
    • 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. repec:cep:sticas:/124 is not listed on IDEAS
    3. 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.
    4. repec:hal:journl:dumas-00909926 is not listed on IDEAS
    5. Frederick Ploeg & Reinhilde Veugelers, 2008. "Higher Education Reform and the Renewed Lisbon Strategy: Role of Member States and the European Commission," Springer Books, in: George Gelauff & Isabel Grilo & Arjan Lejour (ed.), Subsidiarity and Economic Reform in Europe, chapter 5, pages 65-96, Springer.
    6. Pierre Courtioux, 2012. "How income contingent loans could affect the returns to higher education: a microsimulation of the French case," Education Economics, Taylor & Francis Journals, vol. 20(4), pages 402-429, November.
    7. Migali, Giuseppe, 2012. "Funding higher education and wage uncertainty: Income contingent loan versus mortgage loan," Economics of Education Review, Elsevier, vol. 31(6), pages 871-889.
    8. Dirk Schindler & Benjamin Weigert, 2008. "Insuring Educational Risk: Opportunities versus Income," CESifo Working Paper Series 2348, CESifo.
    9. Vincent, VANDENBERGHE & Olivier, DEBANDE, 2004. "Financing Higher Education with Students Loans - The crucial role of income-contingency and risk pooling," LIDAM Discussion Papers IRES 2004036, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    10. V. Vandenberghe & O. Debande, 2007. "Deferred and Income-contingent Tuition Fees: An Empirical Assessment using Belgian, German and UK Data," Education Economics, Taylor & Francis Journals, vol. 15(4), pages 421-440.
    11. 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.
    12. 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.
    13. Vandenberghe, Vincent & Debande, Olivier, 2008. "Refinancing Europe's higher education through deferred and income-contingent fees: An empirical assessmentusing Belgian, German & UK data," European Journal of Political Economy, Elsevier, vol. 24(2), pages 364-386, June.
    14. Rita Asplund & Oussama Ben Adbelkarim & Ali Skalli, 2008. "An equity perspective on access to, enrolment in and finance of tertiary education," Education Economics, Taylor & Francis Journals, vol. 16(3), pages 261-274.
    15. Dirk Schindler & Benjamin Weigert, 2008. "Educational and Wage Risk: Social Insurance vs. Quality of Education," CESifo Working Paper Series 2513, CESifo.
    16. repec:got:cegedp:137 is not listed on IDEAS
    17. Schwager, Robert, 2012. "Student loans in a tiebout model of higher education," University of Göttingen Working Papers in Economics 137, University of Goettingen, Department of Economics.
    18. Canton, Erik & de Jong, Frank, 2005. "The demand for higher education in The Netherlands, 1950-1999," Economics of Education Review, Elsevier, vol. 24(6), pages 651-663, December.
    19. 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.
    20. Vandenberghe, Vincent & Debande, O., 2007. "Refinancing Europe’s higher education through deferred and income-contingent fees: an empirical assessment using Belgian, German and UK data," LSE Research Online Documents on Economics 6211, London School of Economics and Political Science, LSE Library.
    21. Migali, Giuseppe, 2006. "Funding Higher Education and Wage Uncertainty: Income Contingent Loan Versus Mortgate Loan," The Warwick Economics Research Paper Series (TWERPS) 740, University of Warwick, Department of Economics.

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    More about this item

    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; Financial Aid
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy

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