HOW SHOULD WE FINANCE HIGHER EDUCATION?

Universal compulsory school attendance. Free instruction. The former exists even in Germany, the second in Switzerland and in the United States in the case of elementary schools. If in some states of the latter country higher education institutions are also ‘free’, that only means in fact defraying the cost of education of the upper classes from the general tax receipts.” These are the words of Karl Marx in his notes to the Gotha Program in 1875. Nowadays, in most of Europe, the state pays for a university education. Since the beneficiaries are to a disproportionate extent the children of better off families, this means that university finances are quite regressive.

Beyond its lack of progressivity, another big problem of a mostly publicly funded higher education is that university finances can be quite cyclical. In many places, the budget problems during the Great Recession meant that university finances were severely cut, and have not recovered.

As the OECD’s Education at a Glance 2017 report said, “[a]lthough public funding for tertiary education increased in most countries, some are still behind their 2008 peak. This is the case for example for Canada, the­ Czech­ Republic, Hungary, Ireland, Italy, Portugal, the Russian Federation, Slovenia, Spain and the­ United­ States, where in 2014 public expenditure was lower than in 2008” (OECD 2017). Since in most of those countries public funding represents a very large part of total funding for higher education, universities are heavily impacted by cyclical shocks affecting public finances.

AN ALTERNATIVE: INCOME-CONTINGENT UNIVERSITY LOANS

In our recent article (Cabrales et al. 2018), we propose an alternative that prevents universities from being hostages of political cycles. It is basically an income-contingent university loan system. The idea is simple: graduates pay for their education, if they can. The state limits itself to providing an insurance mechanism in case the labour market outcomes of the graduates are not sufficiently positive. We focus on its application to Spain because the country’s labour market shows particularly bad behaviour (Bentolila et al. 2011), so if a loan system ‘works’ in Spain, it should work even better in other places in Europe.

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