3 Oct 2014

Paying for free education

Johanna R writes:*

The possibility of studying at university should depend on whether you are interested in learning and maybe also whether you studied hard during school. It should not depend on whether your parents are able to pay for your education. These were the arguments used by German students protesting for free university education. The protest was successful; after introducing fees, the government abolished them again very quickly. Nevertheless, university education is not free: the government pays for it via subsidies. In Germany, the government pays more than €8,000 per university student annually.

Even though most people have an inkling that somebody is paying for their education, they are not aware of how much it is worth. Thus, some may not value it and thus they may not use it to the fullest.

What if university fees were reintroduced? This time, the government could give the money directly to the students, as a stipend. In that way, education would still be accessible to everyone but students could pay themselves for the education and would ‘feel’ that they are paying for it. Therefore, they may realise that education is actually a valuable good. Here, I present two different versions of this education stipend, considering different degrees of freedom of using the money and I evaluate possible implications.

The first possible version of the stipend is money specifically for university education. Every high school graduate gets a sum of money, for example €25,000 to pay for a bachelor degree. This money can only be spent on university education in Germany. If somebody decides not to go to university, they will have to give the money back to the government. As a result, students know how much they are paying for their education and may demand better quality in return. At the same time, they will take their education more seriously, after all, they are paying for it!

But what about varying prices between programmes? For example, studying medicine is a lot more expensive than studying law, mainly because of the difference in necessary equipment. To ensure that students can still freely choose their subject of study, the stipend would have to be raised significantly: up to €180,000 to cover the full costs of studying medicine in Germany. Therefore, to maintain free choice of subjects, every student would receive €180,000. Since they can solely spend it on studying, the majority of students would only use a fraction of that money. The rest has to be paid back to the government. Imagine that: you receive €180,000, use €24,000 for your bachelor and then pay €156,000 back to the government. Two implications that are not ideal: huge sums of money being moved around means huge administrative costs. Plus: when you have €156,000, you want to spend that money and not give it back to the government. So, what do you do? Study some more… and some more… and some more…

An alternative version of the stipend is giving a fixed sum to every high school graduate without attaching any conditions to it. High school graduates could decide for themselves what they want to spend the money on. Again, the sum could be €25,000. Now, high school graduates would suddenly have a lot of money at their hands that they could spend on virtually anything: travelling to the Amazon, backpacking through South East Asia… or going to university. It is questionable, how many high school graduates would actually have the foresight to save the money to pay for their education. Instead, the government would be paying for some very extensive backpacking trips. This may not be the primary interest of the government that wants to subsidise education to create a better-educated work force. On the other hand, one may argue that travelling the world teaches you a lot more than anything you can learn in a class room.

For those who would want to spend the stipend on university education, the problem of more expensive studies comes up again: If you want to study medicine and cannot cover the costs with the €25,000, how are you going to pay for your studies? Take a loan? Make your parents pay? Or do a cheaper study instead? The idea of providing equal access to university education seems to get lost with this stipend.

Bottom Line: Providing equal access to university education is hard, giving money to people directly seems even harder. Maybe the subsidy to universities is not such a bad idea after all, or we just haven’t found the right stipend system yet. Any suggestions?

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.


Anonymous said...

Nice post. Don't you think the system used in the Netherlands is a nice way to deal with some of the perverse incentives you mentioned? In the Netherlands you are guaranteed a loan which you have to pay off if you don't graduate. In this way, students are incentivised to only go to uni if they think it is for them and have the motivation to do it. In contrast, an actual loan may put some students off who fear dept (but are capable) and a grant may encourage those not suited/motivated for university to enrol.

Raven Hoogendorp said...

Interesting post Johanna!

I believe that prospective students must have an incentive to go to university, as there are many other, perhaps more fun, things that they can do when they’re still young. I don’t think that the stipend versions that you posed would work, as this will mean that the government would invest millions, without knowing whether it will go to university fees. As anonymous wrote, in The Netherlands we currently have a system in which students have to pay their fees if they drop out. When one finishes his/her study the loan will be waived. This encourages students greatly to graduate.

Unfortunately, this will be turned around next year, as every student must lend everything from the government because the current system is too expensive. There have been many protests about this new system, because this discourages prospective students to go to university, as they will have a big debt when they graduate.

The solution to this problem is very hard to find. An option could be more scholarships and funds for people with weak socio-economic backgrounds and for people with high grades. I think this will motivate students to work hard and they will still value their education.

Theresa said...

Interesting post Johanna.
Regarding the ideas and problems you describe, I feel like a good solution located between the benefits of feeling the cost of education and having equal access to any course would be to indeed provide every student with- lets say the €25.000- and make the government subsidize the more expensive programs on top of that. Then students would at least feel the partial worth of their education but would not decide to for example not study medicine out of financial reasons.
To prevent students from studying without graduating, there could indeed be some kind of obligation to graduate within a certain time be involved as it used to be in the Netherlands and is mentioned by Raven above. In so doing, it is however also important to give students the possibility to swap courses at the beginning as you often don´t really know what to expect from a university program and might find out after one or two semesters that you chose the wrong one.

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