| Abstract: |
Governments and universities have trouble reconciling the goalof keeping higher education widely accessible with the needto retrieve some of its costs from students. Student loans offera plausible solution to the problem. But loan programs turnout in practice to have been a disappointing instrument of costrecovery: analysis of twenty-three programs found that studentsrepay only a small portion of the value of the original loan.Subsidies, high default rates, and high administrative costshave eroded the value of repayments. Sometimes loan programshave proved as expensive as outright grants. This article argues that most loan programs could be reformedto improve financial effectiveness—through targeting,charging positive real interest rates, designing repayment plansto take account of the likely pattern of graduate earnings,and ensuring that the oversight institutions can and will collect.Or governments could explore alternative devices for cost recovery,such as a graduate tax. This approach levies a higher incometax rate on beneficiaries of government-subsidized higher educationand thus preserves the idea, implicit in loan programs, of payingfor education with future earnings. As part of an effectivetax system, a graduate tax could bring in significantly morerevenue than traditional loan programs. |
