Tradeoffs of Free Higher Education: Finland, South Korea, England, United States

Tradeoffs of Free Higher Education: Finland, South Korea, England, United States

Timothy Taylor 20/08/2019 5

All goods and service have both a cost of production and a price paid by the consumer. If the government wishes to do so, it can raise revenues through taxing or borrowing to pay for the cost of production for certain goods and services, and thus allow the consumer to receive the good or service for "free." Many high-income countries around the world subsidize part or most of the cost of higher education in this way. 

A choice to make a good or service "free" to consumers has various tradeoffs. It makes the good or service easier to consume for those who could not otherwise afford it. It creates a need for higher government taxes or borrowing. Perhaps more subtle effects are that changing the nature of who pays will also tend to change the quality of the service. In the case of higher education students, if you (or your family) is paying tuition, the level of effort you give, your choice of courses, and the pressure you feel to finish a degree within a certain amount of time are all going to shift. In the case of providers of higher education, if attracting government funds is the pathway to survival, then the institutions will be inclined to follow the lead of government--rather than the desires of students--in choices about who and how many to admit, what to teach, how to staff courses, where to locate branch campuses,whether to expand into online education, what courses to offer, what counts for a passing grade and a graduation requirement, and more.

Some of these changes from switching to "free" higher education may be desirable, while others are less so. My point is that it would be blinkered to imagine that a switch to "free" higher education won't also lead to an array of other changes. In a similar spirit, Jason D. Delisle and Preston Cooper offer a short essay on "International Higher Education Rankings: Why No Country's WHY Higher Education System Can Be the Best" (American Enterprise Institute, August 2019). As they note:

A government that pays for a greater share of each student’s college education can afford to send fewer of those students to college, resulting in lower overall degree attainment. Similarly, without the ability to raise revenue through tuition, colleges may have fewer resources to spend on each student’s education.

The theme of their exercise is to use OECD data on high-income countries to point out some tradeoffs between higher education attainment, total resources, and public subsidies. This seems to me like a useful start in thinking about the many tradeoffs that would be involved in "free" higher education.

Here's the vivid example of Finland, which leads the way in the share of higher education spending coming from private sources, but thus can only afford to have a relatively small share of students attending higher education.

For instance, Finland ranks first on the subsidies metric: 96 percent of the Finnish higher education system’s funding comes from public sources. Domestic and European Union students can attend a public or government-dependent private institution free of charge, and most students also benefit from additional grants to help cover living expenses. But Finland pays the price for those heavy subsidies in other areas: Of the 35 nations, the country ranks 11th on the resources metric and just 25th on attainment.

One reason for the low attainment rate is that Finnish universities have finite resources and considerable autonomy to set admissions standards. Largely lacking the ability to raise revenue from tuition, it makes little financial sense for institutions to admit large numbers of students, and therefore they are highly selective regarding which students they let in. In 2016, just 33 percent of Finnish applicants to first-degree tertiary education were accepted, one of the lowest admission rates in Europe. Universities rely on comprehensive entrance examinations to make admissions decisions, and low acceptance rates create backlogs of applicants who often reapply in later years.

Another example is Korea, which has high attainment and low cost for higher education, but also low government support. 

Korea is perhaps the clearest example of a nation prioritizing one of the higher education goals (attainment) over the other two. Despite its top ranking on attainment, the nation ranks near the bottom on both resources and subsidies. The Korean government pays just 36 percent of the cost of higher education, leaving students and other private entities to pick up the rest of the bill. But the amount Korean universities themselves spend to educate students is also low; they spend just 29 percent of per capita GDP per student. That Korean universities spend relatively less per student means that tuition at public universities in Korea is also relatively moderate, despite the low subsidy rate. Korean students pay less in tuition than other high-attainment countries such as Canada, Japan, and the United Kingdom.

A moderately priced higher education system that relies little on government support, combined with high-quality secondary schools that consistently produce high scorers on international standardized tests, has led the vast majority of the nation’s youth to earn college degrees. However, the relative value of these degrees is well below other OECD nations, as the supply of college graduates has outstripped the availability of college-level jobs. Relative to the rich-world average, college-educated South Koreans receive a smaller wage premium over their peers with lesser degrees. As of 2017, the unemployment rate for college graduates exceeded that of people with less education.

The United Kingdom has been in the middle of a transition from a high-subsidy model for higher education to a model of low direct-subsidies but high and income-contingent student loans (that is, the repayment schedule for the loan depends on what you earn, and if you don't earn enough to make all the payments, the loan is forgiven at some point).

In England, where the vast majority of the country’s population is concentrated, universities charge undergraduate students tuition of up to $11,856, making English universities some of the most expensive in the world. That is why the United Kingdom ranks last on subsidies in our analysis, with just 26 percent of higher education funding derived from public sources. However, Britain’s student loan program complicates this high-tuition, low-subsidy story. To enable students to afford these high fees, the government offers student loans that fully cover tuition. Ninety-five percent of eligible students borrow. Repayment is income contingent; new students pay back 9 percent of their income above a threshold for up to 30 years, after which remaining balances are forgiven. Despite the lengthy term, the program is heavily subsidized: The government estimates that just 45 percent of borrowers who take out loans after 2016 will repay them in full (a benefit not captured in the OECD data).

England’s high-resource, high-tuition model is relatively new. Until 1998, English universities were tuition-free, with the government directly appropriating the vast majority of higher education funding. According to an analysis of the system by Richard Murphy, Judith Scott-Clayton, and Gillian Wyness, rapid increases in demand for education during the late 20th century led to swelling numbers of students and therefore a precipitous decline in resources per head available to universities. In 1998, the center-left government of Tony Blair began allowing institutions to charge tuition to supplement their direct government funding. At the same time, the government expanded its student loan program and introduced income-contingent repayment. Over the next two decades, university enrollments and funding both surged, and today the United Kingdom ranks among the top nations for both resources and attainment. While the 1998 reform allowing institutions to charge tuition was a major development, England’s transition from a high-subsidy country to a low-subsidy
one happened more gradually.

For the record, the United States currently ranks 11th of the 34 countries in higher ed attainment (measured as the share of 25-34 year-olds with "tertiary" education); 3rd of the 34 countries in total amount spent per higher education student (measured as per capita spending on higher ed vs. per capita GDP for the country, so this US ranking doesn't just reflect higher US income levels); and 31st of the 34 countries in subsidies (measured as share of higher ed spending coming from public sources).

The authors offer some general patterns in this data (and they are careful to warn that these are correlations, not statements about underlying causes). Across the high-income countries, a higher share of higher ed funding coming from government is correlated with a lower level of total per student spending on higher education, and also a lower level of higher ed attainment for that country. The US experience generally fits the these patterns: the US has lower subsidies for higher ed, but higher total spending and top-third in higher educational attainment.

A version of this article first appeared on Conversable Economist

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  • Matt Stark

    America has the best universities. If you want to become successful, study there, you won't regret it.

  • Tony Ellis

    My three kids are currently enrolled in a French school. I am proud of them.

  • Jordan Keenan

    British universities are underrated !

  • Tarun Kumar

    South Koreans are smart, no doubt about it

  • Bill Sherman

    Wake me up when studies will become free

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Timothy Taylor

Global Economy Guru

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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