Financing Higher Education: A Contributory Scheme

Higher education underwent a deep transformation in the 1990’s that has resulted in national and international ’education market’. The Bologna process combined with regional standards for cycle lengths (Bachelor, Master, PhD) and credit transfer, opened a European space for higher education. In France, since the LRU (law on liberty and responsibility of universities, published 10 August 2007) and associated reforms, universities are progressively entering the field of competition and being invited to ensure self-funding. This kind of financial autonomy is already present in some of the OECD countries, where a substantial part of the funding for higher education comes from tuition fees. Under this system, each student is invited to invest financially in her human capital by takingon a debt if need be, in order to produce a return on this investment in the labour market. We referto such financing schemes a self-funded system for higher education.

Following the correspondence with pension scheme systems and discussions, we propose a contributory funding system for higher education and compare these schemes in relation to their efficiency, equity and ability to fund higher education. Of course, as in the case of pension schemes, this raises the deeper issue of the relative efficiency of a market based system versus a socialized system based on inter-generational solidarity and public service. In this sense, it is a political issue since it involves two different perspectives on education: as a source of future income, or as a social good. It is an issue that is receiving great attention in the media; in the recent years, large increases in tuition fees have led to student demonstrations in many countries: England has increased its tuition fees ceiling from £3,300 to £9,000 and has increased students’ borrowing capacity; the Canadian state of Quebec has seen a major social movement against the project of a progressive increases in tuition fees from $CDN2,168 to $CDN3,793. In France, Université Paris IX - Dauphine and Sciences Po, two public institutions, have imposed high fees. 

In this paper, we study the higher education financing based on the classical contributory versus self-funded pension funding scheme. We provide a brief discussion of how a system based on student debt can be seen ’funded’ and why it fails to ensure equity and efficiency and funding for the longer term. We also define a contributory financing scheme for higher education based on income tax and social security contributions, and study its strengths and weaknesses. By contributory, we mean a scheme that ensures free access to university, providing for students’ expenses and the costs of research and teaching. We show that such a system would be efficient and equitable, and we discuss under what conditions it woud be efficient. We show also that it would prevent polarization in thehigher education system. We conclude with an implementation of our contributory financing scheme in the case of France (it increases university funding by €5bn and provides €19bn for students’ expenditure) and illustrate the effect of such a scheme on some typical households.