University financing: sustainability, efficiency and redistribution

Students across the globe employ a diverse array of financial mechanisms to fund their higher education: from grants to subsidies. Even within Europe, there is a significant variance in financing systems. For instance, the Nordic countries rely on a model of generous scholarships. Conversely, in the United Kingdom and the Netherlands, loan-based financing is more prevalent. Meanwhile, nations such as Austria, France, and Spain, among others, exhibit less developed financial instruments—private or public— and have long used direct subsidies to educational institutions funded with general taxes. When the main part of university resources is publicly and directly provided, government budget cuts have a strong impact on the survival and quality of tertiary education institutions. In the face of an ageing population and large and increasing public deficits, we analyze whether a subsidized system of progressive Income Contingent Loans (ICL) is feasible in Spain, and how it would impact different strata of the population. We find that (1) our proposed structure is highly progressive under all specifications, with the top quarter of the distribution paying close to the full amount of the tuition and the bottom 10% paying almost no tuition; and (2) the share of total university education subsidized by the government is between 16 and 56 percentage points less than under the current system.