Tertiary education subsidies can be delivered in the form of:

* tuition subsidies (either given directly to students or indirectly to tertiary education providers); or

* living support allowances to students; or

* subsidised student loan scheme;

* scholarships (either merit-based or needs-based).

The choices about how to deliver subsidies are dependant on a number of other policy settings, including the nature of government's relationships with providers and students, the level of subsidy and risks of misuse of subsidies. However, since a loan scheme is designed to transfer costs of study into the future when students are better able to meet these costs, it does not make sense to put in significant subsidy components into the loan scheme as this would be inefficient. The exception would be the necessary public subsidies in an income-contingent type loan scheme. See the section on Support for Tertiary Education Students.

There are arguments for and against subsidising the living costs for students. Arguments in favour of subsidising living costs are that:

* students are more likely to be resistant to borrow for living costs since the benefits resulting from accommodation, food and transport are immediately consumed and have no future pay-back (unlike the knowledge and skills acquired through tuition). While students can earn some income while they are studying this can very quickly detract from the learning opportunity and this is to be avoided;

* those who are unemployed receive a basic benefit to cover essential living costs in most countries and, therefore, to not subsidise student living costs may reduce incentives to acquire a tertiary education.

The arguments against subsidising living costs are that:

* the government, like the student, receives no benefits from subsidising students for living costs. Public and private benefits arise from the tuition only. If basic living costs are not covered by a benefit for unemployed people, the unemployed may become liabilities to a government (through higher crime, higher health care costs, etc). This situation doesn't apply for students.

* students are generally able to secure some employment while studying. This may be either during the long vacation breaks, or throughout the year on a part-time basis. It is reasonable to assume that students should support themselves (possibly with a system of hardship grants for those that can't). Providing a borrowing facility through the student loan scheme may be the only backup required.

There are also arguments for and against subsidising tuition costs. The arguments in favour of subsidising tuition tend to be stronger than those against since:

* public benefits arise from the tuition that the student receives;

* students will make their educational decisions primarily on factors that relate to tuition cost and quality, therefore subsidising tuition will bring better educational opportunities within reach of students that can't afford tertiary education (although this argument is weakened with the availability of loan finance).

If considerable government subsidies are provided for tertiary education, as is the case in most countries, then it is probably reasonable to subsidise both tuition and living costs.

Since beneficiaries and students from low socio-economic backgrounds may be reluctant to borrow for living costs, targeted income support arrangements or needs-based scholarships may be key instruments in increasing tertiary education participation. A system of hardship grants may be another possibility for students who have exhausted all other sources of finance and who face higher than normal or unexpected costs (eg. high travel costs, childcare costs, bereavement, etc.). Providing access to hardships grants is likely to prevent these students from dropping out. Many education providers have a system of hardship grants, funded either from general revenue or from philanthropic sources so any government program needs to be careful not to "crowd out" these schemes.

Given the public benefits that arise from tuition, it is likely that subsidising tuition will increase participation and ensure that public benefits arise from tertiary eduation. The sensisitivity of students to tuition fee levels will determine the effectiveness of tuition subsidies in raising participation. Targeting tuition subsidies may be desirable in order to minimise deadweight effects.

Merit-based scholarships are a means of creating incentives for excellence, but are unlikely to increase participation as much as other forms of subsidy, since the more able students are more likely to participate regardless of cost.

This article Copyright © 1999 Mike Woods MPP BSc DipTchg, Mike Woods & Associates