Financing Higher Education in the United States

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Unclassified ECO WKP 2007 44, Organisation de Coop ration et de D veloppement Economiques. Organisation for Economic Co operation and Development 06 Dec 2007. English Or English,ECONOMICS DEPARTMENT,Unclassified. ECO WKP 2007 44,FINANCING HIGHER EDUCATION IN THE UNITED STATES. ECONOMICS DEPARTMENT WORKING PAPER No 584,Peter Tulip. All Economic Department Working Papers are available through OECD s internet web site at. www oecd org eco Working Papers,English Or English.
JT03237659, Document complet disponible sur OLIS dans son format d origine. Complete document available on OLIS in its original format. ECO WKP 2007 44,ABSTRACT RESUME,Financing higher education in the United States. America s higher education system is among the best in the world Nevertheless there is scope for. improvement In particular there appear to be substantial financial barriers to higher education despite. large government expenditures aimed at promoting access Policy makers have proposed addressing these. barriers by increasing student grants However grants are costly inefficient inequitable and ineffective. Income tax concessions and state government subsidies suffer from similar problems In contrast. international best practice seems to be converging on student loans with repayments that vary according to. income Income contingent loans facilitate access to college at low fiscal cost and without the inefficiency. and inequities that accompany grants subsidies or tax concessions At the same time they do not. discourage risk averse or uninformed students in the way that conventional loans do The United States has. an income contingent loan programme that should be expanded While the design of repayments could be. improved the main problem with this programme is that lending limits are too low Higher limits. especially for unsubsidised direct loans would benefit students and promote access at little cost to the. government Were a good system of loans in place then less cost effective means of promoting access. such as grants and tax concessions should be cut back. JEL classification codes H52 I22, Key words Education United States Income contingent loans Pell grants. Financement de l enseignement sup rieur aux tats Unis. L enseignement sup rieur am ricain compte parmi les meilleurs du monde Cependant il y a des. am liorations apporter dans plusieurs domaines En particulier il existe d importantes barri res. financi res l entr e dans l enseignement sup rieur malgr d importantes d penses publiques destin es. en promouvoir l acc s Les responsables politiques ont propos d all ger ces barri res en augmentant les. bourses d tudiants Cependant les bourses ont un co t budg taire lev et sont d une efficacit et d une. quit douteuses comme le montre l tude Les r ductions d imp t sur le revenu et les subventions de. l tat souffrent des m mes probl mes Par contre ce qui semble le mieux fonctionner au niveau. international est le pr t aux tudiants avec des remboursements adapt s aux revenus Des pr ts. conditionn s aux revenus faciliteraient l acc s l enseignement sup rieur pour un faible co t fiscal et sans. l inefficacit et l iniquit qui accompagnent les dotations subventions et r ductions d imp t En m me. temps ils ne d courageraient pas les tudiants mal inform s ou r ticents prendre des risques comme le. font les pr ts conventionnels Les tats Unis ont un programme de pr ts aux tudiants remboursables selon. le revenu il devrait tre d velopp Tandis que l am nagement des remboursements devrait tre. perfectionn le principal probl me de ce programme reste que le plafond des pr ts est trop bas Un plafond. plus lev surtout pour les pr ts directs non subventionn s profiterait aux tudiants et encouragerait. l acc s aux tudes sup rieurs avec un moindre co t pour les pouvoirs publics Une fois un bon syst me de. pr ts en place les moyens moindre co t effectif pour promouvoir l acc s tels les subventions ou remises. d imp t pourraient tre r duits,Codes JEL H52 I22, Mots cl s Education Etats Unis Pr ts remboursables selon le revenu Bourse Pell. Copyright OECD 2007, Application for permission to reproduce or translate all or part of this material should be made to.
Head of Publications Service OECD 2 rue andr Pascal 75775 Paris cedex 16 France. ECO WKP 2007 44,TABLE OF CONTENTS,ABSTRACT RESUME 2. Financing higher education in the United States 2,FINANCING HIGHER EDUCATION IN THE UNITED STATES 5. Background 7,More needs to be done 11,Raising the Stafford loan limits 13. Problems with loans and the rationale for income contingent repayments 17. Other issues relating to student loans 20,Pell grants 21. Simplifying the means test 22,The appropriate role of grants 23.
Tax relief 24,State provision 26,BIBLIOGRAPHY 30, ANNEX 1 IMPLEMENTATION OF INCOME CONTINGENT LOANS 34. 1 Average tuition and fees 2006 07 academic year 9. 2 College enrolment rates by income and achievement levels 12. 3 Limits on Stafford loans as of July 2007 15, 4 Percentage of borrowers choosing different repayment options 2000 19. 5 Estimates of total income tax expenditures in education 2006 24. A1 Income contingent student loan schemes 34, 1 Expenditure on tertiary education institutions 7. 2 Average tuition fees 8, 3 Internal rates of return to tertiary education 2001 10. 4 Selected government support for higher education 11. 5 Student loans and enrollment rates 2003 15,6 Distribution of debt levels 17.
7 Distribution of tax preferences by income 2002 25. 8 Share of revenue of public tertiary institutions 27. Box 1 Secretary Spellings action plan for higher education 6. Box 2 Recommendations on financing higher education 29. ECO WKP 2007 44,ECO WKP 2007 44,FINANCING HIGHER EDUCATION IN THE UNITED STATES. By Peter Tulip1, 1 The United States system of higher education2 is widely seen to be the best in the world That. assessment has a large subjective component nevertheless it appears to be consistent with objective. indicators of quality For example United States colleges and universities offer more choice their. graduates receive greater wage premiums and they attract more than twice as many foreign students as any. other country 17 of the best 20 research universities in the world are in the United States according to the. Shanghai Jiao Tong University, 2 The success of the US system of higher education is often attributed to its competitive and. decentralised structure These features distinguish it in varying degrees from both higher education in. other countries and from primary and secondary education in the United States Hoxby 1999 provides a. discussion Any changes need to build on these strengths. 3 There appears to be scope for improvement however The United States lead is more obvious in. research than in teaching though this may reflect difficulties in measuring the latter And in some areas. other countries are overtaking For example whereas the United States had the highest tertiary attainment. rate in the OECD a generation ago it is now ranked 8th in tertiary attainment among 25 34 year olds. Enrolment rates are now below the OECD average 3 The recent report of the Secretary of Education s. Commission on the Future of Higher Education 2006 known as the Spellings Commission found. much that needed urgent reform The Commission and others have pointed to serious problems in the. areas of accountability quality transparency cost control diversity and many other aspects of higher. education Box 1 outlines the Administration s response to the report Furthermore the newly elected. Congress has its own priorities, 4 Against this background this paper addresses the issue of how governments particularly the. federal government should be involved in the financing of higher education The focus is on the efficiency. and equity of support rather than its level This is not to say that financing is necessarily the most important. issue facing higher education For example it can be argued that inadequate prior academic preparation is. a greater problem However a companion paper Tulip and Wurzburg 2007 discusses the performance of. US high schools Moreover governments spend about two per cent of GDP on higher education primarily. to promote access How well that money is spent seems worth considering Especially so given that. policy makers plan to substantially expand current programmes and that international experience suggests. better approaches are possible, 1 This paper is based on material presented in the OECD Economic Survey of the United States published in.
May 2007 under the authority of the Economic and Development Review Committee EDRC The author. would like to thank Val Koromzay Andrew Dean Jorgen Elmeskov Patrick Lenain Hannes Suppanz. Greg Wurzburg Thomas Weko and Richard Yelland for valuable comments The paper has also benefited. from discussions with numerous US experts including from the government Special thanks go to Laure. Meuro for technical assistance and to Chrystyna Harpluk and Deirdre Claassen for technical preparation. The author can be contacted at ptulip frb gov, 2 This paper uses the terms higher education tertiary education postsecondary education and college. interchangeably though colleges are often distinguished from trade and graduate schools. 3 In 2004 23 4 of US 20 29 year olds were enrolled in education compared with an OECD average of. 24 7 Enrolments for other age groups are also at or slightly below the OECD average Education at a. Glance 2006 Tables A1 3a c1 2,ECO WKP 2007 44, Box 1 Secretary Spellings action plan for higher education. In September 2006 the Commission on the Future of Higher Education known popularly as the Spellings. Commission delivered its final report A Test of Leadership The Commission comprised 19 diverse and prominent. experts on higher education It found that US higher education needs to improve in dramatic ways changing from a. system primarily based on reputation to one based on performance In responding to the Commission s report. Secretary of Education Margaret Spellings announced an Action Plan The Secretary s proposals were as follows. Accessibility, Strengthen K 12 preparation and align high school standards with college expectations. Work with Congress to expand the successful principles of the No Child Left Behind Act to high schools. Redesign the 12th grade NAEP Nation s Report Card test to provide state level estimates of college and. workforce readiness, Raise awareness and mobilise leadership to address the issue of adult literacy as a barrier to national. competitiveness and individual opportunity, Develop a federal research agenda for adult literacy to identify strategies models and programmes that work.
Affordability, Simplify the process by partnering with states to use existing income and tax data to help students complete. the Free Application for Federal Student Aid FAFSA in half the time. Notify students of their estimated aid eligibility before spring of their senior year in high school. Work with Congress to provide new funds for need based aid through the federal financial aid system. Commission an independent management consultant review of the federal financial aid system. Revitalise the Fund for the Improvement of Postsecondary Education FIPSE to promote innovation and. productivity, Encourage organisations that report annual college data to develop consistent affordability measures. Accountability, Work with a consortium of states to build on and link together the 40 existing privacyprotected higher. education information systems, Explore incentives for states and institutions that collect and report student learning outcome data. Convene members of the accreditation community to recommend changes to the standards for recognition. that will place a greater emphasis on results, Redesign the Department of Education s college search website to allow consumers to weigh and compare.
institutions based on their individual interests and needs. ECO WKP 2007 44,Background, 5 International comparisons of tertiary education are difficult because institutional structures vary. greatly across countries Nevertheless the available data indicate that the United States spends much more. on higher education than other countries In 2003 it devoted 2 9 of its GDP to tertiary education about. twice as much as the OECD average As shown in Figure 1 this reflected unusually large private. expenditures with public spending being in line with other countries 4 The high level of expenditure. reflects near average enrolments but very high per student expenditure In 2003 the United States spent. 19 500 on core tertiary educational services per student more than twice the OECD average of 7 800 5. Most of the high per student spending reflects high US income Across countries spending on tertiary. education increases roughly proportionately with GDP per capita Education at a Glance Chart B1 6. Figure 1 Expenditure on tertiary education institutions. Percentage of GDP 2003,Public Private, USA CAN FIN CHE NOR POL HUN BEL JPN ESP IRE AUT PRT CZE ITA. KOR SWE DNK AUS NZL FRA MEX GRC NLD ISL DEU GBR TUR SLV. Source OECD Education at a Glance 2006 Table B2 1b. 6 High private expenditures reflect unusually high tuition fees Figure 2 The average published. tuition fee in the United States at 8 700 a year in 2003 was almost five times the OECD average of. 4 The public private split is only approximate as countries differ in how they classify expenditures For. Financing higher education in the United States America s higher education system is among the best in the world Nevertheless there is scope for improvement In particular there appear to be substantial financial barriers to higher education despite large government expenditures aimed at promoting access Policy makers have proposed

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