«Policy Matters Ross Finnie, Alex Usher and Hans Vossensteyn Meeting the Need: A New Architecture for Canada’s Student Financial Aid System August ...»
The expectations of parental contributions are wrong For dependent students whose parents’ resources are taken into consideration, there is an income threshold below which no contributions are required and the student is eligible for the full amount of assistance available. This threshold varies by province, according to cost of living and tax rates, but effectively the formula exempts families below about the fortieth percentile of family income from making any contributions whatsoever. However, by about the sixty-fifth percentile of family income, parents are expected to contribute 75 percent of marginal after-tax income (if we assume the support of their children comes out of current income), which is extraordinarily steep. Above the seventy-fifth percentile, parental contributions are expected to be so high that virtually no one is eligible for student assistance. At face value, these schedules seem unreasonable. Figure 1 shows expected parental contributions in the Canada Student Loans program and Quebec’s Aide financière aux études.
Furthermore, data on actual parental contributions strongly affirm that the current formulas are wrong on two counts (Ekos Research 2003). First, they vastly overestimate the contributions actually made by parents from the upper two income quartiles. Second, they underestimate the amount of money contributed by families with income just short of the median. As a result, the latter might receive more assistance than they need, while the former definitely receive less (Hemingway 2003a,b). Talks with institutions’ student financial award officers provide further ad hoc evidence of these inequities.
We thus believe that the student financial aid system needs to be recalibrated with respect to parental contributions in order to be fairer and more realistic.
The children of nonpaying parents are punished As explained earlier, the system simply assumes that parents give their children what they should be receiving according to established contribution formulas.
There are, however, many parents who do not give their children as much as expected — or who provide no support at all — and this will always be the case, even if parental contributions are recalculated along the lines we suggest. While most Canadian student loan programs do have an appeal system that allows students
Source: Reprinted, with permission, from Sean Junor and Alex Usher, The Price of Knowledge 2004, Montreal: Canada Millennium Scholarship Foundation, forthcoming.
whose parents are not making the expected contributions to obtain at least some public support, this system is completely unadvertised and hence seldom used.
In most countries, especially those in which tuition fees are high, there is some form of loan system that addresses this precise problem. We think that Canada should adopt such a system.
Loan remission is an inefficient way to help students Canadian governments spend about a billion dollars on nonrepayable assistance annually, but nearly half of this goes to students after they have completed a year of study, or even an entire program, through what is known as “loan remission.” With this form of assistance, the grant is received not by the student, but by the student’s financial institution as a paydown of a portion of an existing student debt. In Alberta, Newfoundland and Quebec, the loan remission occurs at the end of the program of study; it is based on total accumulated borrowing
and is dependent upon timely completion of studies.5 In Saskatchewan, Manitoba, Ontario and Prince Edward Island, it occurs at the end of a given year of study and is based on the amount borrowed that year.
Loan remission is an odd system — and Canada’s reliance on it as a means to deliver grants is unique in the world of student assistance. First, because these programs only pay down existing loans without putting additional money into the hands of students, to the degree students actually need more money to pay their schooling and associated living costs, they provide no benefit. Second, by denying students the money up front, the system of remitting loans after they have been taken out according to certain conditions creates uncertainty about the total assistance packages students will receive; this is especially so in terms of the loans-versus-grants mix, which is an important consideration for many, particularly those from lower-income families. Finally, loan remission programs deliver debt relief with no regard for an individual’s actual debt burdens, as measured by debt-to-income ratios in the payback period. In this respect, they are very different from interest-relief and debt-reliefin-repayment programs, which explicitly take post-graduation income into account.
We thus see a need to eliminate existing debt-remission programs and spend more money on upfront grants (or loans), which provide students with the money they need without creating uncertainty as to how much of it is loan and how much is grant. More money should also be spent on debt relief in repayment based on actual debt burdens (that is, on a comparison of the payments required and the individual’s income) rather than simply on the amount borrowed in a given year or even that accumulated over the student’s entire course of study (Queen’s University, Institute of Intergovernmental Relations 2003).
An International Perspective: Student Financial Assistance in Other Countries International practice shows a wide array of ways in which governments and highereducation institutions help students meet their schooling costs, including tuition fees, other mandatory charges, study materials, living expenses, and room and board (Vossensteyn 2003b). Figure 2 presents an overview of these approaches.
Of course, no single country has a system that includes all these forms of aid.
The precise combination of programs depends on many factors, including each country’s conception of who is primarily responsible for the costs of an individual’s schooling — student, parents, government or a combination of these — which are in turn determined by the country’s ideologies, traditions, political compromises, and budEnjeux publics Août 2004 Vol. 5, no 7 Meeting the Need: A New Architecture for Canada’s Student Financial Aid System Figure 2 Government and Post-Secondary Institutions Aid to Students
Notes: Intermediary institutions include organizations, such as banks and student aid agencies, that provide or otherwise deliver student aid. This figure focuses on the ways in which students are supported in meeting their actual out-of-pocket costs, thus ignoring other implicit forms of support, including the direct operating grants made by governments to institutions, which can be thought of as a tuition subsidy. Because we are mainly interested in public forms of support, we also have left funds provided by industry, foundations and other private sources out of the analysis.
The dotted lines represent nonpublic support; these flows should nonetheless be considered a part of the system, if only because public support often depends on these other sources.
getary constraints (Vossensteyn 2003a). Here we identify a few broad models that allow us to categorize systems of student support and tuition policies in different countries and the groups of students who generally benefit from each system.
The Student-Centred Model In the student-centred model, students are regarded as having primary responsibility for the costs of their studies. As such, they often face relatively high tuition fees. This implies that public funds to higher-education institutions should not fully cover instruction costs and that financial support is focused on students, not their families (although family contributions are taken into account). Australia, New Zealand, the United Kingdom, Japan and the United States provide examples of this approach (ICHEFAP 2003).
Policy Matters August 2004 Vol. 5, no. 7 Ross Finnie, Alex Usher and Hans Vossensteyn In these countries, students are charged considerable tuition fees (sometimes at differential levels by program and institution), while grants, scholarships and loans are primarily awarded to students on a means-tested basis, thus targeting support at students from low-income families and those who are otherwise needy. This approach reflects the (often implicit) expectation that parents will help their children according to their financial capacity, with parental contributions in some countries facilitated through programs such as tax credits and, in the case of the US, a parental loan program.
To what extent do students from low- through higher-income backgrounds benefit from these government transfers? The targeting is ostensibly at lowerincome (and thus higher-need) families, but it does not always work this way in practice. One problem is that in countries where tax credits figure importantly (for example, Australia, New Zealand and the UK), families with high incomes have the best opportunities to reduce their taxable income through those credits. Having higher costs can also increase the amount of support, and in many cases this is again related to family income; these costs would derive from being enrolled in more expensive programs or at more expensive institutions, living away from the parental home or being considered independent from one’s parents. These factors are particularly relevant to the Canadian system (as mentioned earlier) and that of the US.
A particularly interesting example of the student-centred model is found in Australia (Dobson 2003). In 1989, tuition fees were reintroduced through the so-called Higher Education Contribution Scheme (HECS). The flat-rate tuition fee, representing approximately one-quarter of the average instruction cost, has evolved into three different tariff bands, reflecting cost differences between programs and differences in expected future earnings.
Students can pay their tuition up front with a 25 percent reduction or defer payments until after graduation via income-contingent repayments collected through the tax authorities. Because HECS debt has a zero rate of real interest (with only an annual correction for inflation), all students choosing this option are indirectly subsidized (although the absence of the 25 percent reduction can be considered a substitute for interest fees). Those with low incomes after graduation benefit the most from this interest subsidy because they make lower annual payments and have extended (interest-free) repayment periods. A separate system of support for living costs comes from the Youth Allowance program, which provides nonrepayable grants based on parental income and targeted at low-income students, although some funds do leak through the income-testing system to arrive in the hands of students from higher-income families. In addition, certain ethnic groups benefit from more specific scholarship programs.
22 Enjeux publics Août 2004 Vol. 5, no 7 Meeting the Need: A New Architecture for Canada’s Student Financial Aid System The UK system — at least before a set of reforms being instituted at the time of writing — was much like that of Australia. The major difference was that student support for living costs came almost entirely in the form of student loans, with only a limited number of hardship scholarships. And since loans could be taken up by all students, including those from higher-income families, the benefits from the interest-subsidy of student loans was enjoyed widely. Students from higher-income families had to pay their tuition fees themselves, while those from low- and middle-income families could get all or part of their tuition waived. Higher-education institutions delivered small amounts of additional assistance to students remaining in financial need.
But in the spring of 2004, the British Parliament passed a bill that will lead to some important changes in tuition and student support. As of September 2004, grants will be reintroduced for full-time students from lower-income households up to an amount of £1,000 per year (approximately C$2,500). In 2005, the repayment threshold for student loans (below which no payments are required in that year) will be increased from £10,000 to £15,000 (C$37,000) per year. The more important changes will, however, occur in September 2006.
From then on, universities will be able to increase tuition fees above the standard rate of £1,150 to a maximum of £3,000 (C$7,400) per year. As compensation, the grants for lower-income students will be raised to a maximum of £2,700 (C$6,600) per year. Universities that want to charge the additional tuition fees must sign an agreement in which they promise to use part of their additional revenues to, for example, offer scholarships for disadvantaged students or actively recruit students from lower-income families. Finally, the maximum amount students can borrow will be increased, while any unpaid debt remaining after 25 years of repayment will be cancelled (Department for Education and Skills 2003).
These changes to a large extent reflect what has been argued for many years by Nicholas Barr of the London School of Economics. In his view, equity and access can be promoted only through differential tuition fees and, predominantly, loans (over grants) that have to be repaid when students (graduates) experience the financial benefits of higher education (Barr 2004). In many ways, the UK system has, with its increased role for student loans, mixed with targeted grants and generous assistance in repayment through its income-contingent element, moved in a similar direction to the new architecture we propose for Canada.
The Parent-Centred Model In the parent-centred model, parents are morally, and in some cases legally, responsible for maintaining their children during their post-secondary studies, while there are generally no, or only very low, tuition fees. As a result, student grants Policy Matters August 2004 Vol. 5, no. 7 Ross Finnie, Alex Usher and Hans Vossensteyn and loans are available to relatively few students (generally from 15 to 35 percent), and the amounts awarded tend to be small (Vossensteyn 1999). In contrast, parents are substantially subsidized in meeting their maintenance obligations to their children, generally receiving family allowances and/or tax benefits to help them do so.