Introduction and Background
Ireland has experienced rapid growth in higher education participation over the past 15 years: student numbers increased from 86,624 to 155,000 in the period 1994 to 2010 and are expected to grow to 204,000 by 2018. Within Ireland, the vast majority (85%) of third-level funding is provided by the state. Given the current difficult fiscal situation in Ireland, alternative forms of higher education financing have been muted.
More specifically, a graduate tax scheme and an income contingent loan system (ICL) have both been suggested in the recent National Strategy for Higher Education to 2030 as possible alternatives to the current free fees scheme. With the possible policy shift towards alternative higher education financing structures, the impact such change will have from various viewpoints remains unclear. This research attempts to address this issue by examining the impact of the introduction of either a graduate tax scheme or an ICL system. These alternative systems are considered with respect to their redistributional and fiscal implications.
The research uses microsimulation techniques to age a sample of the Irish population, based on the Living in Ireland survey data (1994-2001) up to 2050. We identify within this sample those who had completed upper second-level and tertiary education by the end of their 22nd year. We then track these individuals throughout their lifecycle until the point of retirement. We assume that these graduates pay nothing when they enter higher education but have a student debt of €10,000 at graduation. Under the ICL system, only those who work and earn above a certain limit in a given year contribute towards repaying the debt in that year. As an individual’s employment and income status vary over their lifetime, so too do their repayment obligations on the debt. An individual stops repayments once their debt is cleared, but graduates who do not have their debt repaid by the time they retire simply have the debt cancelled. In an alternative scenario, we assume that the student pays no up-front fees entering higher education and leaves with no debt. However, they must pay a special graduate tax, which takes the form of an extra 1% in PRSI-related charges, for the rest of their working lives.
Outcome and Findings
The results of simulating two alternative higher education finance systems for Ireland are analysed in terms of repayment patterns and redistributional issues and from a fiscal viewpoint. Under the ICL system, the results of the research indicate that with an assumption of a zero real interest rate on student loans, 82% of graduates pay back their debt in full, taking an average of 15 years to do so. The results also show a substantial gender difference in terms of repaying the debt in full: 89% of male graduates do so compared to 74% of female graduates. Males who do pay off their debt in full do so over 14 years on average, while females take 16 years on average.
The ICL system does seem to be fair from an equity viewpoint because those with lower incomes across their lifetimes repay the lowest amount of their student debt and may not have to repay their debt in full at all.
With regard to the graduate tax system, this also holds some qualities of fairness in that those who earn more over their lifetime will pay more than those who earn less. However, the research also indicates that substantially more revenue is generated under this system than under the ICL system. With the graduate tax system, the graduate continues to pay the tax even after the cost of his/her education has been met, whereas with the ICL system, repayments stop once the graduate’s debt is cleared. This means that the graduate tax system may be more desirable from a fiscal viewpoint.
In current circumstances, with growing demand for higher education combined with a tightening fiscal situation, this research may help to inform policy in relation to the manner in which higher education is financed.
Details of Paper
Flannery, D. and O’Donoghue, C. (2011) “The Lifecycle Impact of Alternative Higher Education Finance Systems in Ireland”, The Economic and Social Review, Volume 42 Issue 3, 237-270.
Full copy of the paper available at: http://www.esr.ie/vol42_3/ESRTOC42_3.htm
Dr. Darragh Flannery is a lecturer in economics at the Kemmy Business School, University of Limerick. He completed his doctoral studies through the National University of Ireland, Galway and has spent time conducting research at the University of Essex through the ECASS programme. Darragh holds a primary degree – the Bachelor of Business Studies (BBS) – from the University of Limerick and a master’s degree – the MSc in Economic Policy and Planning – from NUI Galway. Darragh’s primary area of research, the economics of higher education policy, focuses on issues such as higher education participation and financing. He also has a keen interest in teaching and learning methods within economics, specifically with the use of technology.