Who Deserves Educational Subsidies?

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Parental Contributions and

Education Savings Plans

Alex UsherEducational Policy Institute

Accessibility of Higher Education: Challenges for Transitional Economies

Moscow, Russian FederationJune 29-30 2004



Who Deserves Educational Subsidies?

• Three Possible Answers:

1) Everyone equally (Scandinavian model)

2) Future graduates who obtain below-average salaries in the labour market (Australia/UK model – on tuition but not living expenses)

3) Children who come from low-income backgrounds (North American model…also Australia/UK for living expenses)

• If answer is no.3 then consideration must be given to parental contributions



Comparative Evidence on Parental Contributions

28%23%

45%

35% 31%

27%25%

14%

10%

21%

0%5%

10%15%

20%25%30%

35%40%

45%50%

Irl A Bel (f) Bel (w ) Fin Fra D Ita Ned Can

% of total student income from parental transfers



Setting Parental Contribution Rates

• Need a base income below which no contribution is required

• Contribution should rise with marginal income above this amount

• Contribution rules should be easily communicable to parents



Parental Contributions: a Formula to Avoid

Canadian Parental Contribution Formula:

(Y-S) * (.45 for 1st $3000) + (.6 for next $3000) + (.75 for all remaining income)

Y = Family After-tax Income

S = Minimum Standard of Living (varies according to family size and location)



Problems with Parental Contributions

• Some families will not contribute or save the “expected” amount

• There are three ways to deal with this problem:– Deny the student adequate assistance (i.e.

punish the student)

– Set up an unsubsidized loan system to allow students to borrow what parents did not contribute (i.e. help the student)

– Set up measures to encourage parental savings (i.e. help the parent)



Why Savings Programs?

• Loans are about smoothing consumption forward from the point of purchase

• Savings are about smoothing consumption backwards from the point of purchase

• Savings are thus a natural complement to loans



Rationales for Education Savings Programs

• to assist in cost-shifting from state to individuals;

• to discourage an over-reliance on borrowing as a means of spreading costs over time;

• to help families hedge against future tuition increases;

• to help families meet the “expected” contributions of student assistance programs.



Other Examples of Government Savings

PromotionsGovernments promote savings for

other significant life events:

» Pensions

» Home Ownership



Two Types of Savings Programs

• Defined Benefit Programs:

– Contributors make specific contributions over a period of time in order to receive a specific, predetermined benefit at the end of the period.

• Defined Contribution Programs:

– no guaranteed return; the end product is simply the sum of contributions plus interest or gain accruing to the capital over time.



Examples of Savings ProgramsEducational Savings

Housing and Pensions

Defined Benefit

Pre-paid tuition plans (USA)

Bauspar programs (Germany, Central Europe); most state-pension programs

Defined Contribution

RESP/CESG (Canada), Coverdell Savings Accounts (USA)

RRSP (Canada); 401(k) (USA); PEL (France); Chilean-style pension plans



Tools for Promoting Savings

1 - Matching donations to a registered savings program

2 - Providing favourable tax treatment of contributions to a registered savings program

3 - Increasing the rate of return to an investment

4 - Providing favourable tax treatment to the return on investment



Savings Promotions ToolsFavourable Treatment of Capital

Favourable Treatment of Returns to Capital

Cash Benefit

Matching Savings Programs (e.g. Canada’s CESG)

Interest top-ups (e.g. France’s PEL)

Tax Expenditure

Tax deductions/credits for contributions to plans (e.g. most voluntary retirement savings programs)

Tax-sheltered or tax-free growth of savings within registered plan (many IDAs, Canada’s RESPs)



Linking Savings and Loans

• Bauspar model provides specified loans in return for specified savings over time

• Most effective where credit records are weak and value of purchased asset uncertain

• Likely most effective in transition economies



Problems With Savings Programs

• the rich have more disposable income and a greater ability to save than the poor, and hence are likelier to benefit from savings programs

• the rich tend to have higher levels of financial literacy than the poor and hence are better able to take advantage of government programs that promote savings



Canada Education Savings Grant Expenditures By

Income Quartile$150

$101

$70

$40

$0

$20

$40

$60

$80

$100

$120

$140

$160

Highest Higher Middle Lower Middle Lowest

Income Quartiles

Millions in

200

1 D

olla

rs



Canadian Tuition Subsidies by Income Quartile

$2.53

$2.01

$1.55

$1.23

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Highest Higher middle Low er income Low est

Income Quartile

Bill

ion

s o

f D

olla

rs



The Balance Sheet on Savings Programs

• Evidence shows that savings programs are slightly more regressive than tuition subsidies.

• Savings Programs are extremely popular politically.

• Savings programs are cheaper than tuition subsidies; if introduced at the same time as cost-sharing measures, it would be a small regressive program replacing a large regressive program.

• Provided that cost savings from cost-sharing are re-invested in expanded opportunities and a system of grants for low-income students, the net result should be progressive and result in expanded access to tertiary education.



For further information…

Alex UsherEducational Policy Institute

Toronto Office1701-77 Bloor st. West

Toronto, Ontario(416) 848-0237

[email protected]

Who Deserves Educational Subsidies?

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