Oireachtas Joint and Select Committees
Tuesday, 2 May 2017
Joint Oireachtas Committee on Education and Skills
Higher Education Funding: Discussion (Resumed)
We have a quorum, so I propose that we now resume in public session. I also propose that after hearing the witnesses, we will deal with the minutes, correspondence and reports. Is that agreed? Agreed.
I wish to welcome the following witnesses to the meeting: Dr. Charles Larkin, Dr. Shaen Corbet and Dr. Aedín Doris from NUI Maynooth, in addition to Dr. Darragh Flannery from the University of Limerick. They are here to make presentations on the future funding of higher education, and I thank them for sending on their opening statements concerning the Cassells Report. We have heard from a number of witnesses with whom we have engaged and examined the suggestions put before us. This is obviously a very important issue for the committee, as well as for students and the general public. We therefore need to continue our examination of the varying views.
We should express our thanks to Mr. Peter Cassells and the members of his committee who put a great deal of work, time and energy into producing the report. Ultimately, it will be a matter for the Minister to make his decision but we are conscious that we have an opportunity to comment and make recommendations.
I remind witnesses and members of the committee to turn off their mobile phones because they interfere with the sound system and make it difficult for parliamentary reporters to report the meeting. Phones also interfere with television coverage and the website.
I draw the attention of witnesses to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the Chairperson to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. I wish to advise the witnesses that their opening statements and submissions to the committee will be published on the committee's website this afternoon. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.
Without further ado, we will now start with the opening statements. Dr. Doris and Dr. Flannery have a joint submission.
Dr. Darragh Flannery:
We have been asked to appear before the committee to discuss the advantages of an income contingent student loan system compared to other forms of higher education funding. The particular context for this hearing is the recent dissemination of a research paper by Charles Larkin and Shaen Corbet questioning the viability of income-contingent loans in the Irish context from a public finance viewpoint. The committee has previously heard deliberations regarding the importance of the various parameters involved in the design of an income-contingent loan, ICL, system. As a result of the context for this hearing, the focus here will be on how the variation in these parameters impacts on the public finances and how ICLs compare to other forms of funding.
We first provide an overview of the rationale for income-contingent student loans in the Irish context. We then respond to the paper by Larkin and Corbet. Finally, Dr. Doris will present some public debt and deficit analysis of a variety of funding options to provide some evidence on this issue.
In the context of higher education funding, both the level of such funding and the current mix of State support and upfront student fees are widely accepted to be unsustainable. The need for further investment, competition with other areas of public spending, and concerns about accessibility and affordability has turned the main focus of this debate towards alternative funding systems.
As the committee is aware, the report of the expert group on future funding for higher education - the Cassells report - outlined three possible options, namely: a full State model of funding; increased State funding with a continuation of upfront student fees; and increased State funding combined with an ICL system.
Although a fully taxpayer-funded system may seem attractive because it provides access to education at no upfront cost to the student, it is ultimately the most regressive option as it entails a transfer of resources from those who have not benefited from higher education - the lower paid - to those who have - the better paid. Moreover, this option would entail a continued heavy reliance on tax revenue for any future investment in the sector. In addition, it would entail the highest cost to the Exchequer of all of the options considered.
The second option, combining State support with upfront fees, may alleviate some of the public cost in the short and long-term, but raises concerns about affordability and accessibility due to the upfront nature of the costs. The purpose of an ICL system is to remove such concerns while also sharing the burden of financing higher education in an efficient and equitable manner. ICL repayments, which are automatically deducted from the graduate’s pay cheque on the basis of their monthly earnings, are low or zero for low earners and increase as earnings increase, so they are designed to be affordable. Income-contingent debt is, therefore, unlike other forms of debt.
It is important to note that all three options outlined in the Cassells Report involve an increased public cost. This is inevitable, given the recommendation in the report that higher education funding be substantially increased. However, it is also salient that options 1 and 2 are estimated in the report to incur a higher direct cost to the State by 2030 relative to the specific ICL proposal outlined in the report. This is not surprising, since all graduates contribute to the cost of their education under option 3, but not under the other two options.
A note of concern that is specific to the introduction of an ICL system in Ireland relates to the public costs in the initial stage of implementation. These arise because revenue will be lost due to existing upfront fees being removed, while the revenue generated from graduate repayments will take time to flow. The exact design of any ICL system can have a significant impact on the scale of these costs. We will illustrate this point with some examples in the final section of this submission.
Larkin and Corbet purport to analyse lCLs as they would apply in the Irish case, and claim to show that an ICL could not work in Ireland due to the high probability of default. There are serious shortcomings in the methodology used in their modelling of ICLs, many of which are too technical to detail here. One problem can readily be explained, however. In the international literature on ICLs, it is recognised that the default rate is the result of how graduate earnings evolve over time and how repayments are calculated in each particular ICL scheme. Rather than calculating the level of default that would prevail in Ireland, Larkin and Corbet assume that a high level of default would apply and on that basis dismiss all ICLs, ignoring the fact that the default rate of any ICL scheme is a function of its parameters.
A fundamental problem with Larkin and Corbet’s work is that they model the costs of an ICL but do not model the costs of the alternatives. Moreover, they appear to confuse issues of financing with issues of cost. For example, they propose an education levy on earned income that could fund an increase in expenditure resulting from the implementation of option 1.
Apart from the fact that this ignores the significant negative effects on efficiency of such a substantial increase in income taxation and that such an increase is unlikely to be politically feasible, it should be noted that an increase in tax revenue could also be used to fund any outlay associated with ICLs or, indeed, any other method of increasing higher education funding.
It should be stressed that the conclusions of Dr. Larkin and Dr. Corbet are not substantiated by their analysis. Their particularly eye-catching conclusion that an Irish student loan company would create an "Anglo in slow motion" simply cannot be supported.
Despite its shortcomings, the Larkin and Corbet paper has served to focus the debate on the costs to the Exchequer of ICLs. It is obvious that if an increase in higher education funding is provided by means of an ICL, there will be an initial period in which loans issued will not be matched by repayments. The Cassells review addresses the point about the initial deficit, concluding that there would be a build-up of debt of more than €10 billion in the first 20 years of an ICL scheme. This number is based on detailed graduate age-earnings profiles and non-repayment rates that are estimated from data rather than assumed.
Although the figure of €10 billion may seem high, it is worth noting that it would be spread over a long period. Moreover, it is important to note that it arises because the ICL would be associated with a substantial increase in higher education funding, not because of the nature of an ICL scheme. An equivalent increase in higher education funding raised through general taxation would be even more costly, a point to which we will return in our analysis.
It is also important to note that appendix No. 3 of the Cassells report includes a discussion, provided by the Department of Finance, of whether such costs are feasible within the constraints of the fiscal treaty and concludes that they are. However, neither the discussion in the Cassells report nor that in the Larkin and Corbet paper provide a full analysis of the fiscal implications over time of alternative ways of providing for an increase in higher education funding. We have therefore undertaken to provide such an analysis in what follows. Dr. Doris will provide the details.
Dr. Aedín Doris:
For this analysis, I added to the model that I had been working on in my research with Professor Bruce Chapman. In this, we assume that policy makers wish to increase the income from core funding of higher education institutions by €2,000 per student. There are many alternative ways of achieving this, with three options given in the Cassells report. The first is to remove the €3,000 in fees that are currently paid by approximately 50% of students and make a payment of €5,000 per student from central government funding. The second is to retain the €3,000 fees paid by the 50% and apply an increase of €2,000 for all students coming from central government funding. The third is to increase fees from €3,000 to €5,000, apply them to all students and make an ICL facility available. This is the ICL described in the Cassells report.
As well as this basic ICL, we also show results for two alternative ICLs that are designed to have a lower impact on public debt. The fourth option is to incentivise students or their families to pay upfront by giving a 10% discount on fees, resulting in an assumed 10% of students not availing of the ICL. Under the fifth option, in addition to allowing for upfront payment, fees are increased gradually over the early years of the ICL scheme. In the first two years, fees would remain at €3,000 but would be payable by all students rather than the current 50% and are covered by an ICL. In the following years, fees would increase by €500 every two years until they reach €5,000 after eight years. This is a gradual implementation.
To consider the costs of each of these options, it is important to specify the alternative with which they are being compared. Here, each option is compared with the alternative of maintaining the current level and system of higher education funding, that is, leaving fees at the current level of €3,000 per student and increasing annually at the rate of inflation, with 50% of those fees payable by the Government because the students qualify for grants. Using this comparison allows us to take into account the fact that, because of demographic pressures, the cost of higher education funding is set to increase in the coming years even if funding is left as it is without a per-student increase. The analysis, therefore, isolates the effect of increasing funding per student by different methods and only examines the alternative methods.
I have provided graphs in the appendix to this submission that show the effects of the five alternatives on the annual budget deficit and accumulated public debt. It is clear from them that all three ICLs have an advantage over the other options in terms of their effect on the annual budget deficit. It is also clear that all ICLs have a substantial advantage over option No. 1 - the free fees alternative - in terms of their effect on public debt, and over option No. 2 in the long run. In the near term, the effect on public debt of option No. 2 is lower than for the ICL given by option No. 3. However, the calculations for options Nos. 4 and 5 show that it is possible to design ICLs that will have a lower effect on public debt than option No. 2 even in the immediate aftermath of their introduction.
Given the overall picture presented by this analysis, it is important to emphasise that an increase in higher education institution funding by €2,000 per student will be costly no matter how it is done. However, if done through an ICL, the costs to the taxpayer are substantially lower, with the burden being shared with those that benefit financially from higher education. Moreover, an ICL is more equitable. The subsidisation of higher education by those who have never benefitted from such an education is reduced and education is free at the point of access for all students.
In countries that have adopted an ICL to date, their situations at the point of adoption were different to that which pertains in Ireland. In all cases, they were moving from having no fees to a situation in which deferred fees were payable. Therefore, no revenue stream was being eliminated. Moreover, they were not motivated by needing to increase higher education funding per student dramatically. While concern around the public costs of ICL schemes in other countries has been voiced, these concerns largely stem from issues such as graduate emigration, the interest rate attached to the loans and supply-side reforms. These are issues that can be mitigated when designing an ICL, given that we can learn from other countries' experiences in this regard.
There is nothing about an ICL system that is inherently costly in terms of Government finances. In fact, because students repay most of their debt, costs are lower under an ICL system than under systems based entirely on taxpayer funding. The costs incurred if an ICL is introduced in Ireland will not be the costs of the ICL system itself but of moving to a system where no fees are payable upfront for equity reasons and where funding needs to be increased dramatically for quality reasons.
A careful analysis of the fiscal implications of ICLs shows they are entirely feasible in Ireland. The design of any ICL scheme should be carefully considered, as the choice of the parameters of the scheme will determine the extent of the subsidy required. An ICL scheme can be designed so as to minimise the immediate costs of the introduction of the scheme. This should also be a consideration of the design of any ICL, if that is the route chosen.
Our conclusion is that an ICL would allow a substantial increase in higher education funding without reducing access and at a lower cost to the Exchequer compared with other alternatives. The resulting savings can then be used to improve funding for earlier education from preschool through to secondary school, which is where the main barriers to participation in higher education lie.
Dr. Charles Larkin:
I thank the committee for inviting us to speak this evening. I understand that the process has been lengthy for the committee and that this is an indulgence on members' part to hear more evidence. At the outset, I praise Mr. Peter Cassells and his team for their work in highlighting and developing the consensus that now exists on the crisis in higher education funding. I also praise the National Economic and Social Council, NESC, Professor Chapman, Dr. Doris and Dr. Flannery for their contributions towards the thoughtful analysis of the report and subsequent discussion.
My co-author, Dr. Corbet, will discuss the impact of securitisation in the UK and New Zealand and examples from the rest of Europe. At the outset, I will set some context before examining the ICL structure and a number of issues relating to the Exchequer. Throughout this discussion, I would like committee members to think about the question of who they find to be the most important in this exchange: the student, the educational institution or the Exchequer. Each has a stake in this and each could wind up holding the cost, not holding the cost or being risk-free in the process.
Begging the committee's indulgence, I will start with a quote from Financing Higher Education Worldwide: Who Pays? Who Should Pay?by Professor Bruce Johnstone and Dr. Pamela Marcucci. Professor Johnstone of the State University of New York, SUNY, is a co-author of Professor Chapman's and has a useful way of framing the conversation. He writes:
income contingent loans would seem to be less applicable when:... non-governmental revenue is needed [immediately], making the parental contribution to tuition (even with [some] discounting [and excluding amounts for low-income families]) [an important] source of needed revenue supplementation.
The scarcity of governmental revenue precludes government from being the sole lender (which places a premium on student loans that have some--albeit discounted--value on the private capital market).
[Many graduates] (borrowers) are likely to hold multiple short-term jobs, to be employed in the informal economic sector, where records are most unreliable, or to be emigrating.
There is no tradition of voluntary, reliable self-reporting of incomes, and state systems for monitoring and verifying incomes for the purpose of income tax withholding and/or pension or social security contributions are non-existent or unreliable.
That is a useful way of beginning to frame the conversation. We have to look at this as a question of income-contingent loans per se. There is ample evidence that they are a very effective and equitable way of dealing with the problem of financing education. We also have to look at the issue from the point of view of Ireland. In the Irish context, many of the things that were outlined by Professors Johnstone and Marcucci are clearly present.
That brings us to part of the foreground of the background, namely, cost. We have to decide what education is for. Is it fit for purpose? What are we asking the system to do? Costs are increasing. This is partly due to the increased rate of participation in the sector. It is also due to the burdens of mainstreaming the cost of research, which is typically subsidised from teaching income. As institutions become more financially strapped, and it is very clear that, especially in the institutes of technology sector, this is going to be imminent over the next five years, the system of education switches its purpose from developing individuals, the economy and society to sustaining itself and maintaining operations. This is where politics comes in, the decision-making that has to be done with respect to the social planning aspect of higher education.
Now that we have talked about the foreground, let us set the scene. To use the philosophy of the late great New York Yankee Yogi Berra, "The future ain’t what it used to be". In the United States, there is $1.2 trillion in student loans and no higher education institution in America has any skin in that game. They have received the money upfront. The risk is borne by the student, the financial system and the state. That brings us to the possibility of earning. Going to college is a very good idea if one wants to earn but, in the US, 56% of 22 year olds are underemployed. That only improves to 40% by the age of 27. When we begin talking about Ireland, we have a serious problem of education mismatch. Profiling different parts of the education system, we note that the mismatch becomes quite acute when we talk about arts students. Seamus McGuinness of the Economic and Social Research Institute has showed that the education-labour market mismatch has reached a height of 33%, one of the highest in Europe. Ireland is not alone. The same circumstances exist in the UK. Baroness Wolf, in her report Remaking Tertiary Education, published last November, highlights this as a major problem for their system.
We also have to look at the other aspects of the economic conditions around us. Last week in its world economic outlook, the International Monetary Fund highlighted a general reduction in labour income as a proportion of overall output. This finding is supported by Professor Robert Gordon. The proportion has been declining since the 1970s. Part of this has to do with the fact that advanced economies have had a particularly sharp decline in middle-skilled labour. Routine, advanced abstract thinking jobs are disappearing, for example paralegals and junior solicitors. Those jobs are being replaced by algorithms and these are the people we expect to be earning enough to repay student loans. The response to this has already been clear in the US. They have been moving from a "K through 12" – kindergarten through to age 12 – system to a "K through 14" model. The idea is that universal level 7 higher education is going to become a reality in the city of Chicago within the next two years.
We have certain particular Irish problems. One is the level of dropouts. One in six third level students drop out, increasing to roughly 26% when we begin discussing the institutes of technology. We also know that there are great information asymmetries and uncertainties built into the system. There are deep information asymmetries on the part of the student with respect to the educational product and the labour market. In the US, there is strong evidence that even when students overcome these asymmetries - 60% do not - they overestimate their salaries by 13%.
Finally, there is the matter of cycles. According to the latest estimate by the IMF, advanced economies will experience a significant economic shock to their fiscal system of approximately 9% of GDP every 12 to 18 years. That means an event such as the recession of the late 1980s or the one we just went through, with the IMF-EU-ECB bailout, will not be an occurrence that happens once in a human lifetime but will be experienced several times in the lifetime of any given graduate or person in this room. Those who survived 2010 had better build a survival kit because it will happen again.
That brings us to what happens with the student. We will call our examples "Sean" and "Maura". Sean is located in Dublin and is studying a finance course at one of the universities there. He intends to go off to the City of London and become a high earner. He has limited desire to return to Ireland. He also lives at home. From his point of view, the income-contingent loan covers his fees. He will go off to his high-earning job and his ability to repay will be based entirely upon his compliance with the Irish authorities when he is away from home. In addition, the major cost of his education, approximately €13,000 per year, will be accommodation and living expenses, which are now covered by his living at home.
Maura is going an institute of technology and comes from a somewhat poorer background but does not qualify for a grant. She has an income-contingent loan. She has a desire to do social studies and wants to become a social worker. It is a decently paid, solid job but it is not highly paid. She goes into the workforce and will eventually pay her income-contingent loan because she is in the Irish tax system. As a PAYE worker, she has no escape. If there is a crisis and her income drops by 20% or 28%, as happened during the recent crisis, it will become more difficult. This is before we discuss her leaving the labour market for brief periods to have children.
That gives a picture of some of the complexities that will need to be worked out in legislation, statutory instruments and regulations in order to make an income-contingent loan system work in Ireland. This is before we begin to discuss the issue of the student experience and whether what we are providing as higher education is fit for purpose. We are fixated upon trying to pay for it but have not really asked if the students are getting the best deal. Is the quality still there? We know the system is in crisis and, if it crashes, there will be a massive reputational effect for Ireland from which it will be difficult to recover. Throughout this conversation, however, we have not really asked if we are creating an appropriate higher education system that will work for the 21st century.
From the point of view of the institutions, we know that this system will not be capable of funding capital expenditure. The solutions that have been found in income-contingent loan systems such as the British one have relied on the capital markets. In Britain, they have also relied on the Bank of England to provide support in that context. We know that rankings require much more money than an income-contingent loan system could provide. At present, the best universities in Ireland, on an income-per-staff-member basis, still have half the income of those against which they are competing in the United States and under a quarter of those in Asia.
We must then look to the Exchequer. Not only does it have to finance this in advance, it also has to find a means for cost recovery. Dr. Corbet will focus on the securitisation process, which is crucial if Ireland is not to wind up financing this entirely itself. Ireland has very limited headroom. Part of the process that has taken place since the crisis is a move towards fiscal stress tests. They work tirelessly to remove contingent liabilities from the State's balance sheet. That is the case that would exist with income-contingent loans, which is why Dr. Corbet and I have looked at this.
Within our analysis, we have found that only 38.5% of the loan profile is of investment grade, subject to securitisation over a 20-year time horizon. In order to make the system effective, one would have to keep the default rates below 15%, institute a minimum payment cap of €2,000 per annum, and keep an interest rate between 7% and 8% over baseline sovereign rate. One would have to have an EIB loan or a special purpose vehicle generating roughly €600 million to €700 million per annum and overall it would generate €7 billion in net losses until it reaches a point of stabilisation in year 18. If one wants to do that faster, one will have to increase the interest rates to more than 10% and drop the default rate to zero. Ultimately, the interest rate is paramount in the system because of continuous compounding. It has a damaging impact on inequality since it will place those in the €25,000 to €35,000 income bracket into a debt spiral very easily.
It is also important to note that wider issues of access and inequality are structural. They require investment in the earlier years of education and in other components of the education system. To entirely look upon the higher education system for the solutions is essentially looking for a plaster. Our research has found that approximately 50% of graduates would be unable to pay the full net present value of the income-contingent loan over a 20-year time horizon. We can only be sure that approximately 31% will pay entirely.
On the matter of reporting, which was mentioned at the outset, in the United Kingdom the Student Loans Company has an operating budget of £138 million and it dedicates £15.7 million of that every year to fighting fraud. For those in that system who are abroad, a full 41% of them are either in arrears or uncontactable so the cost of administrating that becomes rapidly very expensive. Also, in New Zealand they have had to resort to the criminal code in order to ensure compliance on the part of those who owe income to the New Zealand system, in certain cases going as far as arresting people at the airport.
Overall, our research shows that income contingent loans are a risky course of action. They have the potential to create large contingent liabilities for the Exchequer and would modify significantly the social planning objectives that have been worked out between the Government and the higher education institutions. If income contingent loans were investigated, it could very quickly become the case that cost recovery becomes the principal objective of the higher education system and issues of equity, social policy and the higher objectives of education will become secondary. Overall, they would not provide the €5.5 billion in capital expenditure required for the capital deficit that still exists in the higher education space. The Government would need to propose substantial legislative changes not only on the accounting side in institutions, but also create a loan company and a loan recovery system and it would be of the complexity and the cost of something along the lines of the Legal Services Regulatory Authority.
These conclusions are based upon evidence but they also indicate that further investigation is required. Many of the decisions lie in the political system and those decisions of social planning relate to the setting out of the parameters that the system will operate under and that changes the model substantially. Ultimately, the political system has to give us guidance in order to model it in a way that is effective.
Income contingent loans in our views are only one part of what would have to become a suite of different solutions to a deep and wide-ranging problem in the higher education sector. Taxation, increased student and family involvement and income-contingent loans, in addition to other dead instruments, would all have to be used in concert in order to solve what are very serious and in many ways intractable problems.
At the end of the day higher education has to be paid for and there are only three options: the student, firms and the Exchequer. In all circumstances it is about revenue and not debt, as debts ultimately have to be repaid by revenues generated by income, profits or taxes. In conclusion, the view is that, first, we must decide what type of higher education system we want and then we can decide how we can finance it. I will now hand over to Dr. Corbet to discuss the complexities of that.
Dr. Shaen Corbet:
I thank the committee for inviting me here today. I have worked with Dr. Larkin to present our estimates of how a potential ICL system would perform if it were introduced in Ireland. We have conducted an analysis of the 2014 to 2015 graduating student cohort to investigate the viability of a potential ICL system where the results of some of the analyses which we have conducted are contained within our submitted report. We will present evidence of a variety of scenarios in the near future and wish to stress that our estimates are based on a working methodology.
I will not go through the results in detail. Instead, I will give a broad overview of our key findings to date and the evidence of the risks and issues that have been identified in international ICL systems. We are faced with the dilemma of implementing a system that provides equity to all participants, that promotes student access and which will not impose losses upon the Exchequer. ICLs possess the capacity to generate affordability of repayments. However, we focus upon the potential costs and specific risks that are contained within the system, particularly as ICLs are usually guaranteed and in some cases directly funded by the state. A potential ICL system must recognise that we are losing a significant proportion of our most qualified students to emigration and that some of our academic institutions possess substantial non-progression rates. We must note the student loan growth in the UK has been associated with a substantial increase in household debt. That has occurred as recently as late 2016. UK university fees have now increased and have been capped at £9,250. It is estimated that the average graduate will now leave higher education with approximately £44,000 debt.
We must then consider the potential scenario of a couple, for example, who would leave college with approximately £88,000 debt and what a bank manager would say should the couple seek to obtain a mortgage. It would be perceived to be highly problematic and we would hypothesise that this type of debt could manifest itself into episodes of real economic shocks, perhaps in the property sector in the near future, without considerable research and effective planning. We must also consider research by the Institute for Fiscal Studies in the UK, which recently concluded that approximately 70% of the graduating students there in 2015 were expected never to finish repaying their student debt.
Our updated methodology, presented today, utilises available pre-crisis datasets to identify the correlation between age and salary, which have been enhanced through the inclusion of data sourced from Irish employment vacancy sources, consultation with recruitment companies, student bodies, university career advisory services and publicly available data to estimate Irish salary growth using recentered influence functions, RIF, among a number of other methodologies. The estimated salary distributions are then modelled upon gross earning ventiles which are separated by the course the student has completed, as denoted by the ISCED field of study. These ventiles incorporate specific information based upon the gender, level of education and facility in which the student attended. We have selected a wide range of potential career avenues that students within each discipline are considered to undertake, through analysis of university course advertisements, national educational advisory sources and further aided by the Georgetown University report from 2015, The Economic Volume of College Majors, from which we could allocate a 20-year earning estimate based upon our estimates of graduate salary. As a robustness test, our modelled salaries are found to be in line with the recent HEA report, What do Graduates do?, based upon the graduating cohort of 2015. We have modelled our baseline ICL repayment threshold on the median graduate salary, which is estimated to be €25,000, when considering the number of students graduating within each discipline. The assumption that all graduates can complete 20 years of employment was made. In terms of age, we are starting with baseline graduates.
Dr. Shaen Corbet:
We have made the assumption that everybody who graduates at this time has 20 years of service to give and will be in employment for 20 years. The 20-year models were selected due to evidence based upon the most likely period of debt securitisation, which is the process commonly used in other jurisdictions such as the UK. We have implemented an expected loss methodology upon these forecasts based upon the proportion of the loan book that would be repaid over 20 years.
The expected loss is calculated as a function of the graduating estimate of €18,000 owed, which is calculated as €3,000 for four undergraduate years in university and €6,000 for one postgraduate year. We then built our ICL model on these forecasts, applying similar repayment thresholds and replaying categories such as those found in the UK ICL system. Once salaries reach the income-contingent level of €25,000, we assume the student will then proceed to repay the loan. We estimate the methodologies upon the repayment of 10% of gross income being repaid to the ICL upon an interest rate of 1.5% on income in excess of €25,000 and 3.5% on income in excess of €45,000.
Our decision to present our estimates excluding grant recipients was based on our stakeholder consultation to date, which has presented considerable opposition to any changes in the grant structure. Our methodology incorporates the estimated graduate emigration and incompletion rates as provided by multiple sources, including individual universities and the HEA. We estimate that the top five ventiles or 19.8% of students will achieve break even within 20 years. We accept that this group will generate a profit over the period. However, we find that the expected loss of the lowest ventiles, 19 and 20, is more than 98%, incorporating 5.7% of the graduating students. These would be considered to be lowest earners upon graduation.
We also present our estimates for profit and loss within the proposed ICL system. We can clearly observe that, outside the grants paid by governments each year, the system would necessitate annual liquidity provision of between €600 million and €700 million for the first seven years. However, we find the system would reach a break-even point at year 18 where it would return a profit after reaching an estimated running loss of €7.1 billion. These estimates are completed under the assumption that the economy continues to grow unaffected between the start up of the ICL and the break-even point.
Dr. Shaen Corbet:
The rate of growth is assumed to be 1%. This is a highly unlikely scenario, particularly as a shock such as that experienced in the recent economic collapse would render the ICL system in immediate danger due to two significant side effects. One is raising the necessary capital and the second is student non-repayment due to a host of reasons, such as unemployment and wage reductions, as witnessed during the recent financial crisis. There is also evidence to suggest that there exists a functional ICL system for postgraduate education across most education facilities. This appears, based on these preliminary estimates, to merit further investigation.
Five key characteristics increase the probability of negative outcomes should an ICL system be implemented. The first is emigration, which has presented itself to be one of the major issues associated with the New Zealand system, which has manifested itself into approximately NZ$1 billion in overdue overseas student loans. The second issue is the non-progression rate. Further research is necessary to estimate the potential effects of non-progression on a potential ICL system. Currently, it is assumed to be 21% of IOT students and 11% of university students. The third issue is based on salary shocks. One substantial issue identified within wage shocks is they do not influence each sector equally. Analysis of the earning hours and employment cost survey indicates the extent to which there has been inequality in wage recovery. Continued wage restoration to pre-crisis levels has not presented in the education and health sectors by approximately 5.7% and 6.2%, respectively. The fourth issue is based on potential securitisation to generate liquidity. In the UK in late 2013, it was widely reported that a company called Erudio Student Loans had been named the successful bidder on the 1990 to 1998 loan book, which was estimated to be worth £890 million. It eventually sold for £160 million, a discount of approximately 82%.
Another key issue is economic contagion. In mid-2016, theFinancial Timesreported that following a dramatic increase in university fees in the UK, student loan debt had increased by £12.6 billion in 2015-2016, standing at £86.2 billion. This increase in fees has a direct effect on household that, reiterating my earlier point. There are some key points to note. Policy options have a shelf life. This may have worked between 2003 and 2006 during the Celtic tiger era but it may not have been acceptable between 2008 and 2014. We do not know at the minute; more research is needed.
I previously worked as an equity and commodities trader and I also worked with in the financial stability division of the Central Bank. I teach postgraduate classes in DCU in financial theory, derivatives and financial engineering. Student conversations these days are based mostly on living conditions and commuting and they are not generally about fees. It is about the cost of living associated with going to college. We must continuously focus on our high taxation and household debt when compared to our European counterparts. We do not have much space to increase household debt further and certainly not in line with the UK estimates and the way its system has expanded.
In my time at DCU, we have noticed the pressures on our system. At our business school, for example, under the leadership; and direction of Professor Anne Sinnott, we have improved efficiency and quality, which has been represented in our recent Association to Advance Collegiate Schools of Business, AACSB, accreditation leaving us in the top 5% of the international business schools. This occurred in the midst of the funding crisis. This presents evidence that some university departments have adapted to circumstance. This crisis is about adaptability and resource management combined with funding. In line with funding options, perhaps solutions could be found in the efficiency and performance of the system as a whole. The question is: who is more important - the student, the educational facility or, indeed, the Exchequer?
Based on our estimates, we find that an ICL system would be a risky course of action for Ireland. It has the potential to generate significant liabilities for the Exchequer while generating future economic distortions through the additional debt imposed on our graduates. Further research is necessary to test potential side effects of such a system. We must remember that this is an education system and not a banking or lending system. We must accept that an ICL system would modify the significant social planning objectives that have been put in place and we must note that it is reliant on economic stability and cannot be guaranteed in the long term. As identified across other ICL systems, there are inherent issues for a variety of reasons, including emigration and the ability to absorb further unsecured debt. We conclude that seeking a single panacea to higher education funding in the form of ICLs may not be an appropriate choice due to the system's vulnerability and certain social and economic characteristics which are found in Ireland.
I thank Dr. Corbet. We have had four excellent presentations. We are all agreed that we are in crisis in respect of third-level fees, both currently and given the demographics coming down the line. Ultimately, we have to do what is fair to students, their families, universities, and the taxpayer, particularly as the taxpayer has a significant stake in this.
I thank everyone for their presentations. I tried as best I could to dissect them before the meeting but I did not understand some of the figures and I will seek clarification on them. The moment we allow the State to even step out slightly in respect of education, we will move towards the privatisation of our education system, which will not be a positive. I would like Dr. Corbet and Dr. Larkin to respond to my initial questions before I turn to Dr. Doris and Dr. Flannery.
Could Dr. Corbet and Dr. Larkin elaborate on the New Zealand model given that the government there is considering the arrest of defaulting emigrants at its airports? People will be criminalised for returning home. Could they also refer to the Hungarian system? What impact could the introduction of loans have on the future borrowing ability of graduates?
What effect will the high current and expected household debt in Ireland have on the proposed ICL system? It was pointed out to me today that Australia's household debt is similar to Ireland's but the figures seem to be compared more as they are now than in 1989, when income-contingent loans were introduced and when, I believe, disposable income was quite steady. It was during the 1990s that Australia started to see a shift in its economy. I also ask the witnesses to explain how they believe the ICL model would not solve the third level funding crisis, in particular given the initial cost of the model. It was said it would take up to 17 years before we even began to break even. If the system is in crisis, what happens between now and 17 years' time? It is still not clear whether the training levy would be an additional resource to education or a replacement for lost resources, so there might not even be any revenue there either in the interim. What effect will an ICL model have on a future equitable or social policy in education?
There is a point in the written statement submitted by Dr. Doris and Dr. Flannery that the fully taxpayer-funded system may seem attractive because it provides access to education at no upfront cost to the student but that that is regressive. Do they not feel that those who earn more should pay more? In my view, this would be a progressive, not a regressive, system. In response to another point in their statement that the amount one repays is based on one's monthly earnings, as we can see from the research by Dr. Larkin and Dr. Corbet, there is expected to be a high rate of default. Who do Dr. Doris and Dr. Flannery expect to pick up the default? Is it the taxpayer? Who would absorb that cost?
There are two points in the presentation by Dr. Doris and Dr. Flannery at which reference was made to incentives. I find it quite worrying that anyone would feel it appropriate to propose to give a 10% discount to those who could afford to pay upfront. That is inappropriate. I think they are proposing to reward those from wealthier backgrounds who will be in a position to pay upfront and almost punishing students from poorer backgrounds who will not be in a position to avail of a 10% discount. Even the inclusion of a proposal for such an incentive in the two witnesses' presentation is very worrying in respect of how they view equity of access to education.
I have one more question to put perhaps to both sides of the debate. The issue of gender, which I had not thought of, was raised in respect of gaps in women's participation in the workforce and how the debt will hang over them much longer if they have to take longer periods out of work to care for children. Is this already an unfair system when gender is considered, but also in respect of people with disabilities who will enter university burdened perhaps already with high costs in terms of their living costs, medication and wheelchairs if they have them or anything else additional they may need for their health? Have Dr. Doris and Dr. Flannery considered that people with disabilities will be put off having a further loan put on top of them if they have any kinds of health-related issues?
I am very concerned that the burden of debt is placed on the poor. My child, for example, is in leaving certificate year. Were an income-contingent loan introduced today, I would pay her fees upfront with or without a 10% discount. The poor person, the person coming from a one-parent household or the person with no income coming into the house does not have choice; such people are forced into debt. The debt will therefore end up transferred onto the person with the lowest income because the person who has wealth has a choice whether to take an income-contingent loan. I feel that income-contingent loans on this basis alone should not be considered at all.
I thank the witnesses for their presentations. I come from the position that we must stop viewing education as a cost but as the investment it is. I wish to delve more into the potential impact of these income-contingent loans on emigration. We are a country that suffers from emigration and with a youth unemployment rate of 14%, are we not at huge risk of shedding our talented graduates? It is very alarming to see how New Zealand is dealing with this. It is basically monitoring graduates living outside New Zealand for arrest when they return. We do not want to see that happen to our graduates in Ireland. We want to hold them in our country and encourage them to stay here.
Before I was elected to the Dáil, I was a teacher for 16 years in a DEIS school. Consequently, I am very aware of the student who is first in his or her family. It is a complete departure to consider entering third level. They need to be held and encouraged along the line by family and by school. It took my breath away to see in Dr. Doris's and Dr. Flannery's submission the proposal for an incentive to pay upfront. Obviously, there is not a tad of understanding for the student who can never, ever imagine paying upfront. It is completely unfair when we should be addressing equality of access and opportunity in education. Talk about being blind to the very children we should be targeting to bring into third level. These are gifted children for whom the cost is stopping them from entering third level. Not only do I feel it is wrong for the student but I also believe there is a risk to the State when we consider countries in which the payback rate is as low as 30%; the one in six dropouts, as was referred to, a rate which rises to 26% in our institutes of technology, IOTs, the potential for default through emigration and two recessions 20 years apart. Then we see on page 84 of the Cassells report that the estimation is €10 billion of debt in the first 20 years. That leads us into the next cycle, which, as mentioned, could be a recession. Is that €10 billion of debt therefore vastly underestimated when one takes all of this into consideration?
Finally, Senator Ruane raised the issue of gender but it struck me today: what happens to the stay-at-home parents, be they mothers or fathers, who go to work and then decide instead they want to stay at home with their children? What happens in that scenario?
I thank everyone for their attendance. It would be great if all public policy was decided like this, with some of our top academics coming to a televised session to be interviewed by politicians. I think we would have better public policy if that were the case. It is absolutely wonderful that we have four PhD-holders here giving us their views even though they are different. I hope we are interrogating both sides to try to get some answers because it is ultimately us who must make the decisions. I wanted to say that because it is fantastic and it is a pleasure to be here listening to them.
I agree with Dr. Doris on one point and had never really thought about it like this previously. I am in principle in favour of free education - we all are - but it is true that one earns more the more highly educated one is. Therefore, it is a transfer of resources from the lower paid to the higher paid. There is no question about that. I have never heard that expressed before but I agree that it is the case. That is worth bearing in mind in all of this debate.
We in Fianna Fáil have kept an open mind on the Cassells report, and I have kept an open mind here today and will continue to do so. I have not yet been convinced by either side of the debate, which I think is good because I do not think we have got enough information to make a decision yet.
We have to hand Dr. Larkin's and Dr. Corbet's report. I heard Dr. Larkin speak at the Technological Higher Education Association, THEA, conference, and both met me subsequently. I thought this was very useful and I thank them for making their time available to many of us. We also have a response we requested from Dr. Doris and Dr. Flannery, which is also extremely useful. However, by Dr. Larkin's and Dr. Corbet's own admissions, this is not finished; it is a work in progress. I do not know how but I was under the impression that this was a finished product and that of Dr. Doris and Dr. Flannery is a response. Should the committee or the Chairman ask somebody else - perhaps the ESRI or a similar body - to examine all these issues and this massive body of work that has already been produced from these four generous individuals here? I wonder is that a route the committee should go down, but that is an aside.
There seem to be many assumptions built into Dr. Larkin's and Dr. Corbet's paper. Something that struck me was the 1% economic growth projection. I know there are recessions and so on but perhaps they could explain that a little more. It is not the figure political parties use in their manifestos but perhaps there is a happy medium somewhere else. I do not know.
Dr. Corbet and Dr. Larkin refer to graduates being available to repay the loan over a 20-year horizon. Will they elaborate on that point? Does it mean graduates would have a 20-year window within which to work? I would be a little surprised if that were the assumption.
Dr. Corbet and Dr. Larkin discovered through their research or made an assumption that 50% of graduates would be unable to pay the full net present value of the income contingent loan over a 20-year horizon. Their modelling, according to their presentation, "shows that we can be assured of repayment in only 31% of graduates". This strikes me as an extremely pessimistic view. If 50% of graduates were unable to repay the full value of the loan and repayment was only assured in 31% of cases, what would anybody be able to pay? While the loan would be substantial, it would not be the largest debt a graduate would have as a mortgage repayment would be larger. According to these projections, a very high percentage of graduates will be unable to repay the loans. Given the pessimistic scenarios presented, who would pay the general taxation that would be required under an alternative model? It seems we would not be able to do anything under these assumptions.
I am asking questions purely to elicit information. I am very grateful for the work the witnesses have done because it has got us thinking on a new level, which is what we need to do.
I thank the witnesses for their contributions. I remain totally unconvinced that an income contingent loan system is a means to address the financial crisis in the higher education system. I share the view of many others that such a system would impact on under-represented groups and children who grow up in disadvantage. It would exacerbate the cycle of disadvantage and I do not see any merit in the proposal.
Will the witnesses provide an overview of exactly how much it would cost the Government to operate an income contingent loan scheme for the next ten years? What level of State investment would be required? Will they advise further as to whether the proposed model would be a Government backed scheme or special purpose vehicle or would it be privatised, as Senator Boylan indicated? If a Government backed scheme were implemented and the default rate was higher than anticipated, what options would be available? Would student numbers have to be cut or fees increased and would unprofitable loans be sold off to private investors? How would the Government retain control of the terms and conditions attached to loans?
If a special purpose vehicle were established, what conditions would be required to ensure this vehicle remained off balance sheet? How would the State retain control of overall policy? Would it be possible for the special purpose vehicle to remain in State ownership, rather than being privatised? Would the terms and conditions attaching to loans be set by the Government and, if so, how would this be achieved?
A paper should be drawn up to answer the questions I have asked because the proposal gives rise to many questions. It is impossible for the joint committee to make a recommendation in light of the many questions that the model for student loans generates. We have not been given sufficient clarity to even consider the income contingent loan model further.
Tá céad míle fáilte romhaibh. I was delving into my past during the presentations. For a while, it felt as if I was back in my bachelor of commerce class in University College Galway. Unfortunately, much of the material went over my head, although I tried to follow it as best I could. While the presentation was very interesting, it brings to mind the expression that while the doctors differ, the patient dies. Opinions on this issue diverge and it is difficult to identify where the true path lies.
On the social reading for the data and what it will do for key adult milestones, for example, mortgage acquisition and starting a family, the evidence from New Zealand and Australia, which was outlined previously to the joint committee by the Union of Students of Ireland, is that income contingent loans are having a negative effect on these milestones and delaying them by years. How do Dr. Doris and Dr. Flannery respond to the evidence that people are starting families and taking out mortgages later as a result of income contingent loans?
Given that participation rates by mature students and part-time learners plummeted to 40% after income contingent loans were introduced in the United Kingdom, what impact would such loans have on these groups in Ireland? It should be noted that mature students and part-time learners have been targeted in the Access Plan 2015 to 2018 as groups to be incentivised to enter higher education.
According to the submission made by Dr. Doris and Dr. Flannery, there is nothing about an income contingent loan system that is inherently costly in terms of government finances because students repay most of their debt. However, the evidence from every jurisdiction in which income contingent loan systems have been introduced is that they are incredibly costly to the State, as evidenced by the need to increase fees every year beyond inflation levels to recuperate costs. How can we expect circumstances in Ireland to be different from those prevailing in other countries?
As previous speakers noted, interest rates will mean that students who cannot afford to pay €5,000 per annum will end up paying much more for higher education that those who can afford to pay €5,000 per annum. Is the proposal to provide a further 10% discount to those who pay upfront not simply an incentive for the wealthy, one which places lower income families at a further disadvantage?
I listened with great interest to Dr. Larkin and Dr. Corbet. What I picked up from Dr. Larkin's contribution was that we must look at the overall cost of education and follow the money. His basic argument appeared to be that rather than an education system, we have corporations in which there is significant waste and that much of the money being provided to these corporations is not being used to educate students. Will he indicate where the money is going? Dr. Corbet stated the model in place in Dublin City University was changed. How was it changed? How were the university's finances reorganised and where was funding spent and savings made?
There seems to be no end to the money available in third level institutions to spend on legal fees and hiring consultants, whereas money is not available to provide materials for science laboratories, etc. What does this say about priorities?
I am interested in the education-labour market mismatch to which Dr. Larkin's and Dr. Corbet's paper refers. It notes a mismatch of 33% in the case of Ireland. I taught in two third level institutions and I was shocked by the number of students who appeared to be doing the wrong courses. How do we address this issue? How much money is being wasted in the system? If we addressed waste and reduced the rate of drop-out at third level, we would reduce the need for income.
Reading Dr. Larkin's and Dr. Corbet's paper, it struck me that an income contingent loan scheme could be an Irish Water for education. That may be a simplistic conclusion but it appears that it is proposed to pump up to a €1 billion per annum into a system and ask people to pay for it before the system itself is fixed. In the case of Irish Water, large amounts were spent on creating the infrastructure of the company but we did not fix the pipes. Is it Dr. Larkin's and Dr. Corbet's view that we must first fix what is broken in the third level education system and ensure money is being spent in the right places before pumping money into it to prop up the current system and cost model?
Dr. Corbet referred to the context of household debt. One cannot view the income contingent loan as being the only loan a person will have. We all meet large numbers of graduates with arts degrees who are working in coffee shops, restaurants and hotels and earn the minimum wage or less. These people will want to raise families, get on the property ladder and take out mortgages. Would they have a future under a system of income contingent loans or would the system add to household debt and create an even greater divide between the haves and have nots?
Dr. Corbet also alluded to adaptability and resource management and summed up by describing third level as an education system as opposed to a banking system. This is the first time I have considered the issue from that perspective. I would welcome the witnesses' responses to my questions.
I will comment rather than ask questions because some of questions I intended asking have already been put. This morning, I listened to a debate on my local radio station which featured Dr. Ed Walsh, the former president of the University of Limerick. Dr. Walsh pushed the idea that graduates should get a job and repay their student loans once they reached a certain income threshold. Interestingly, this proposal received more support than any of the other options presented in the debate in a live poll. It was interesting that the loan proposal appeared to be the most attractive.
I thank the Senator for that interesting comment. I will not take up too much time myself as we need to get back to the four experts and professionals. However, areas of concern to me would include equity of access and ensuring that, no matter what, we are not putting more barriers in the way of students. I was going to say young people but sometimes older people want access as well. The issue of choice was referred to by Deputy Martin. I would be interested in the witnesses' thoughts on students who start to work, become parents and then make a decision for one reason or another to stay at home and care for their children.
There is a huge concern about what has happened in the United States and New Zealand. None of us could or would ever condone a situation, and we would ensure we never have it, where people who have not paid back their loans have the bailiff or the sheriff knocking on their doors.
We cannot say that loans do not happen at this point. This has been lost a little bit. I know of many situations - I am sure all of us do - where parents took out significant loans to ensure their children go to college, particularly those who are just over the SUSI threshold and those who live outside of a city where there is easy access to college. Members of my family have taken out loans with high interest rates for further education such as a masters degree. We have been lucky to go on and get good jobs and be able to pay them back. Loans are a matter of fact at this point but they are not income contingent.
There was an interesting article in today's edition of The Irish Timesabout a study by Professor Chapman and Dr. Doris. The size of a loan was set at €16,000, which would be €4,000 per year of study, and its repayment would kick into play, possibly, when a graduate would reach the average graduate salary of €26,000. Repayment would therefore be completed by the age of 33. To put a bit of balance into the debate, this goes against some of the figures.
The suggestion is that the fees would be raised by €2,000 if income contingent loans were introduced. Therefore, those figures are wrong because they are based on €4,000 a year while the fees would actually go up to €5,000 per year.
I accept that, but whoever would be in government would have to ensure that did not happen. We are in a situation where we need the Government of the day to invest in higher education. No matter what happens in terms of finance down the road, we absolutely need investment at this point. We sat here and listened to the leaders in the area from the universities and the institutes of technology say that they are at absolute crisis. It has to be a given that the Minister for Education and Skills sells that to the Cabinet when decisions are made. We would have hoped for a commitment to more investment in the last budget but that did not happen. We will be putting on huge pressure to ensure that investment comes in at the next level. However, we still go back to the issue of supporting the students of today and the students of the future and ensuring equity of access, which is very important.
I will revert to the four witnesses. Would they like to speak in the same order? Otherwise, they can indicate. I am in their hands. We will start with Dr. Doris.
Dr. Aedín Doris:
Deputy Nolan and others - I have lost track - asked about the overall cost of income contingent loans. There is a concern that this will be very costly. The concern was also raised by Dr. Larkin and Dr. Corbet. What is being missed is that, if we accept we need an increase in higher education funding, which, working in the sector, I certainly accept, there is no way to do it cheaply. The alternative of funding it through higher taxation will also add to the national debt and the deficit. What I showed in the analysis in the paper is that it will add substantially more to it, which will reduce the resources available for other uses, including the kind of uses that would be much more effective at promoting access.
I completely agree with Senator Ruane that access is paramount. I would never be in favour of these loans if I believed they damaged access. I said the same thing at the committee. We have a lot of evidence from other countries, thankfully, that we can benefit from. When fees in the UK went from €3,000 to €9,000 overnight, which was a huge increase in the prospective debt faced by students, there was no negative effect on access at all. Students understand that the investment they will undertake will pay back. They understand the high return on education. They also understand that these repayments will be made in the future and only if they can afford them. Australia and New Zealand found the same thing, which is that there is no negative effect on access. I agree with Senator Ruane that they should not be considered if there were.
Dr. Aedín Doris:
No. No one is saying this is the solution to access problems. I agree absolutely with the Senator. However, it does not damage access. What improves access are measures taken at first, second and preschool level. There is a huge amount of research on what prevents students from going to higher education. It is about the quality of primary and secondary schooling and the expectations there are of them. There are things we can do to change those expectations and to change the performance of some schools where expectations are not high and the supports are not in place.
There are things we can do, but they are earlier in the system. By the time students get to the point of having their CAO points and going to university, it is almost too late. There is a little bit that can be done at the edges and it is important to do it. I completely accept that there is a little bit that can be done and it is important that it is done, but the much bigger issues lie much earlier in the system. That is where the focus should be when it comes to access. The Senator is right that it does not improve access, but it is not designed to improve access.
Is it fair to say that the effect of the student loan means those who come from poorer backgrounds are the ones burdened with the debt more so than the person whose family can afford to pay upfront? It is not about inequity of access to college but an inequality in terms of who is left burdened with debt.
Dr. Aedín Doris:
There is a distinction to be made in terms of the generations the Senator is speaking about. What she has in mind when she speaks about the inequality of the system is parental income and how that affects who pays the most. If we think about it, graduates are adults by the time they graduate. At that stage, we judge them on their own income. Some people from very poor backgrounds become corporate lawyers and those corporate lawyers should repay the cost of their education.
Dr. Aedín Doris:
I see the Senator's point. We can see from all the research on earnings in the workforce that, even if we hold the level of education and things like CAO points constant, the kids of better-off parents do better in the workplace. It is an advantage to have better-off parents. We will not get rid of that overnight. I would like it to happen but it will not happen. Therefore, when we are targeting resources, the important thing is to get the people who turn out to have benefited most from education to pay for it. Students whose parents pay their fees upfront may also be those whose parents paid for their private education. These parents will also be the ones who will provide the deposit for these students' houses when the time comes.
Well-to-do people help their kids in many ways. If parents do not spend their savings on fees, they will spend it on something else. When fees were removed back in the 1990s attendance at private schools and the use of grinds increased not by the poor kids but the well-to-do kids. Parents used the resources that they would have spent on education fees to give their kids advantages in other ways. These kids are going to be advantaged. Whether they are advantaged by their parents paying their fees, paying for grinds or helping to pay a deposit for a house, the final outcome does not matter in terms of how well off they end up. It is a matter of shifting between pots. Does the Senator see what I mean?
No. It still matters to the child who has no choice in such matters. We need a system to ensure that when a family's earning power falls below a certain amount that there is an option not to pay fees. The free fees system simply shifts the wealth to grinds and private school fees. The exact same thing will happen if we introduce income-contingent loans. The poor children will be the only ones who pay the debt. They will pay for the education system through an income-contingent loan. Such a situation will affect their future prospects, their ability to get on the property ladder and their ability to make parental decisions. The scheme would reinforce the ability of better-off children to have more freedom in their lives and not leave college with a financial burden because their parents will pay. The situation would be unequal.
Dr. Aedín Doris:
From my point of view, the regressivity that involves people who have never had a higher education paying for the higher education of anyone else is far more serious. It seems completely unfair to me that so much of the taxes paid by people who have never gone to college or whose kids have no intention of ever going to college are used to pay for higher education to give people a leg-up through the income distribution. It is a much greater unfairness than asking people from poor backgrounds but who end up doing well in the labour market as a result of having a degree to pay a contribution towards those costs. It is a matter of emphasis.
Dr. Aedín Doris:
Senator Ruane and Deputy Catherine Martin mentioned how much they dislike a 10% discount for an upfront payment of fees. We concentrated on the public finance implications for introducing an ICL. The only purpose for the inclusion of the 10% proposal was to show that if one is really concerned about the public finance implications, there are ways of getting around them. Whether one chooses that particular route is another matter. It is a matter of political choice. We wanted to show that there is no inevitability about massive deficits in an ICL system once it is introduced. Even if there were massive deficits in an ICL system, the same amount of funding, funded through any other system, will have an even bigger deficit. That is the reality.
Dr. Darragh Flannery:
I wish to follow up on the point made by Dr. Doris. The UK system offers a discount and figures show that 10% of students in the UK avail of the discount. The majority of students are encouraged not to avail of the discount because the cost of their education is lower if they take out a loan. The cost is spread across a long period and the interest rate is lower than how fast their graduate wages will grow. It means that students can chip away at their debt. The people who pay upfront end up paying more in real terms for their education than those who pay back their loan over a longer period. Students who wish to pursue higher education in the UK are advised that the smartest financial thing to do is to take out a loan. It may sound counter-intuitive but students enjoy a greater Government subsidy because the cost is spread over a longer period. Students in the UK benefit more compared with the people who pay upfront. One would imagine that more people would drift towards paying 10% upfront but figures suggest that only 10% of students avail of the scheme in the UK. A similar scheme was abolished in Australia. As Dr. Doris has suggested, the upfront payment was used as a mechanism to boost initial funding. Initially, the uptake of that upfront payment was approximately 15% in Australia.
Senator Ruane mentioned the impact that household debt has on education. It is important that I mention the issue of repayment burdens. The Australian and Hungarian systems have in-built repayment burdens. Therefore, repayments in a given month or year cannot go above a certain percentage of income. The parameter can be flexible and decided upon. Mitigation of some of the impact on household debt in a given year or period is built into the system. In Australia the system is gradual and has various steps. The repayment burden increases to a maximum of 10% for higher-earner graduates. Lower-earner graduates above a certain threshold may pay only 2% in a given year or month, depending on their situation.
Senator Ruane made a few points about the redistribution effect of a free fees system and how the public should finance fees through a combination of upfront fees and State assistance. As we mentioned in our submission, one issue with the current system in Ireland is that in times of recession, spending on higher education must compete with all the other sectors. The issue becomes more acute in higher education. What tends to happen in a time of recession is that demand increases but funding decreases. There is a contradiction in Ireland because education heavily relies on direct public funding.
Senator Ruane mentioned Hungary and New Zealand. She directed her questions at Dr. Larkin and Dr. Corbet but I shall answer too. The Hungarian system is probably not the best comparator with Ireland because it initially introduced loans for maintenance grants. In other words, Hungary abolished maintenance grants and simply provided loans for maintenance grants. The matter has not been talked about here in any context, as far as I am aware. Hungary introduced loans for student fees post-2012. The impact has yet to be analysed because the students will only graduate this year. Also, the system was completely privately financed. The Hungarian Government gave a guarantee but the model is privately financed, which differs from the systems in the UK and Australia.
Emigration was mentioned a couple of times as a problem in New Zealand, which it is and was. Research has shown, however, that a bigger issue in respect of the public finances and the sustainability of the New Zealand system was the interest rate applied there. The New Zealand Government applied a zero nominal interest rate that was way below the cost of Government borrowing. The interest rate was way below the amount of money that the Government took out to loan to students. A far lower interest rate was attached to the scheme than it borrowed at, which caused repayment problems. The interest rate was by far a greater problem than the graduate emigration problem. Lately, some adjustments have been made to the system. I suspect the reason such a scheme was introduced was because an election was in the offing.
Shall I respond to the questions posed by the other Deputies?
Dr. Darragh Flannery:
Some of the issues raised by Deputy Catherine Martin overlapped with those raised by Senator Ruane. The Deputy stated that education is an investment. It strikes me that the loan system treats education like an investment because the people who get the most return from the investment are the ones who end up paying back. The people who do not get a return on the investment do not pay back the investment. They are inherently guarded by the system, which is income contingent by nature.
The implications for a stay-at-home parent were mentioned a couple of times. A stay at home parent can be insulated by putting an income threshold in place and if their income is below that, they will be accommodated. If people make that choice from a household or any other point of view, this higher education funding mechanism would ensure that they would not face these repayments simply by making that choice.
Dr. Darragh Flannery:
Yes. To answer Deputy Nolan in regard to the impact on access, as Dr. Doris suggested in terms of social inequalities and such issues, the system is inherently free at the point of access, as a fully taxpayer-funded system would be. Our submission shows the deficit and the funding implications of comparing those two systems. It shows that one system has significantly more adverse impacts from a debt or deficit perspective than the other.
Deputy Thomas Byrne asked what would happen if there were to be a recession. Third-level graduates have probably the most safeguards against the impact of a recession. If one looks at the previous recession in Ireland, graduates were affected but other people in society were particularly negatively affected. The system can remain sustainable across periods of recession.
Senator Ó Clochartaigh mentioned the idea of a build-up of debt and milestones in terms of mortgage and family formation. If one looks at the alternatives, for example, if higher education funding were increased, people might not face repayments in terms of income contingent loan system but may face higher taxes. The studies that the Senator mentioned in terms of the impact of-----
Dr. Darragh Flannery:
Of course, yes. If one pays up-front fees for higher education, people may be cognisant of potential college or education costs in the future in terms of family or household formation or whether to have one or two children. The alternatives do not mitigate or get rid of those types of-----
My question was in regard to the effect in other countries where the loans have been introduced. Have people postponed taking out mortgages or having families until later in their lives? What does the data show?
Dr. Aedín Doris:
The studies that have been done in Australia do not show any effect. One could come up with anecdotal stories of people who say they were left in that situation and made a decision but, looking at the mean, as these studies tend to do, there has not been an effect. Family formation has been happening later in Australia but that is following a trend that was happening before income contingent loans were brought in. Family formation is also happening later in Ireland. There is an international trend that women are more educated and are having their babies later. When one discounts that trend, income contingent loans have not had an impact on family formation.
Dr. Charles Larkin:
Whatever I do not cover, Dr. Corbet will deal with in his response. Dr. Corbet will respond to Senator Ruane in respect of New Zealand and Hungary.
In terms of high debt levels and household debt, Ireland is still in the repayment paying down mode. If one looks at systems that have been brought on line, as Dr. Corbet said, there is a shelf life for policies. When these policies were introduced in other countries, in many cases the countries had very low household debt levels which have increased over time. One counter-example to that is the UK, which had a high household debt level to begin with.
The training levy is still an open question politically. Therefore, nobody really knows where that €200 million is going to go. In terms of overall higher education funding, that €200 million is an exceptionally small plaster to keep the higher education system operational.
In terms of equity issues, an income-contingent loan has to be kept simple. Complexity is problematic for those from poorer backgrounds with respect to financial instruments. They are very risk-averse against them. I have shown that, following the crisis, the upcoming generation has a greater level of risk-adversity than their parents. There has been a change in how people behave as a result of the crisis, which is not surprising.
We build a pay differential between genders into our model. Unfortunately, Ireland does not have legislation requiring men and women to be paid equally and that must be taken into account.
The income-contingent loan structure means that people who are disabled or leave the workforce at different points in time would not have to pay during that period. It does not eliminate the debt hanging over them. The real question is what to do about individuals who leave the labour market. If they have a mortgage-style loan, they have to continue paying, whereas if they have an income contingent loan, they do not have to pay. If the cost of their education is provided through a grant or some sort of fee remission scheme then they do not have that repayment anyway.
Dr. Charles Larkin:
No, but the Revenue will keep track of the person because if he or she begins earning again, the Revenue will become very interested in being able to collect the payment from him or her. There needs to be a revenue collection system that operates at a zero marginal cost to add this structure to it.
To answer Deputy Catherine Martin, youth unemployment is a very serious issue. It is part of the reason why Rahm Emanuel has brought in a new policy in Chicago of moving towards a K-14 or kindergarten to the second year of college as opposed to a K-12 of kindergarten to 12th grade education system to try to reduce the number of people not in education, training or employment, or "NIETEs", as The Economistcalled them. The youth unemployment solution is more education. Many similar arguments can be found in economic history tomes about the debate which took place at the end of the 19th century regarding public finance of secondary education or the high school movement as it was called.
In terms of the monitoring of graduates in New Zealand, new bilateral agreements have been made between the New Zealand and Australian governments in order to share revenue information. One way that the immigration could be solved would be to redesign the Irish taxation system to make it American, which means that that tax is collected globally. If one is an American citizen, regardless of where one works or where on earth one is, one has to pay taxes to Uncle Sam. It is as simple as that. If that type of taxation system were used in Ireland, many of these problems would disappear. However, I am not sure if that is a policy decision the Government is ready to make.
The issue of the stay-at-home parent concerns similar issues to those I addressed in answer to Senator Ruane.
The issue of economic conditions is very important. The Irish Fiscal Advisory Council has been very, very clear that Ireland is a highly volatile economy. It is a small open economy which is subject to exogenous shocks. The shocks have upwards of two standard deviations effect on economic growth figures. There are very few countries which have that sort of sensitivity to external shocks.
As a result, the understanding of the Irish Fiscal Advisory Council about what to do with respect to Irish public policy amounts to wrapping it in as much cotton wool as possible because the fiscal position can change rapidly. That has been the lesson from the financial crisis and that is part of what informs the policy.
Deputy Byrne raised another question. I think his idea of having the ESRI carry out a comprehensive study of all the different scenarios and all the different plausible policy options is important. Evidence-based policy is essential, especially in this area because the price of getting it wrong is so high.
The 20 year time horizon was built into the model because of the idea of the plausibility of repayment and securitisation. When we are considering the net present value, the problem is compound interest over time. If we start with compound interest rates, even at low levels, then what I call the unpleasant fiscal arithmetic becomes very difficult very quickly.
Reference was made to general taxation alternatives. There are different ways of looking at the question. Ireland has a taxation system that is progressive, but it results in high levels of taxation as we go above 150% of average income. Average income is €35,000. In addition, Ireland, despite that skewed scenario, has a low revenue to GNP level in comparison with similar advanced western economies. That is something to take note of. It is also important to note that in many of the countries where an income contingent loan system has been successful, far lower headline rates of taxation apply and there is far more disposable income in the hands of the individual repaying loans. We have to be careful about the incentivisation for individuals to stay within the jurisdiction and pay.
Deputy Nolan asked another question relating to the issue of looking at Government balance sheet operations and special purpose vehicles or privatisation. Essentially, much of this is determined by the way in which we can approach the investment clauses in the European treaties. If we are going to create a special purpose vehicle, we must have a relatively high return that is equal to the five year moving average of the cost of funds to the State. Moreover, we must have it designed in such a way that 51% of the risk burden is held by private entity rather than the Exchequer. As a general rule, Government-guaranteed or Government-associated special purpose vehicles are frowned upon not only by the OECD in its fiscal assessment but by the IMF in its fiscal stress tests as well. They believe these vehicles are structured in such a way that they could become highly pro-cyclical at the very point when pro-cyclicality is not welcome.
I will address Senator Ó Clochartaigh's question. There is some good research when it comes to looking at the effects on households. In fact, two speeches given by the president of the Federal Reserve Bank of New York in the past fortnight have adverted to the impact of student loans on household formation. Such loans delay household formation for up to four years, if not more in certain circumstances. In the US context, these are mortgage-style loans, so the pain can be more acute. However, there is also evidence in the UK that the overall volume of the loan is taken into account in the assessment for scoring for mortgages. A person does not have to repay a loan following job loss. However, if that person is carrying a certain quantum of debt, then it is taken into account when lenders are scoring mortgages, just as if they were looking at other debt instruments.
The question of whether income contingent loans are not inherently costly is an open one. Many things may not be inherently costly but circumstances can make them so. That is part of what we argue about.
There was a question on the modelling of where the money is going. Part of what we have found in our analysis is that there has been a substantial increase in the amount of income going into the sector over time. However, this is not necessarily related to an increase in the amount going towards student education. Part of this has to do with the design of the system. Considerable cross-subsidisation is built into the structure. Part of the reason we have a large number of arts students in our system is because their full economic cost is rather low. The saving can go to subvent people who are in medicine and sciences, which are expensive. Unfortunately, this creates a situation whereby it can become encouraging to have a large number of those students, but those students will have employment mismatch upon graduation. This scenario has strong welfare effects as well. If we could analyse the Irish system in the way the US state university system is analysed, we could see how it becomes highly problematic because of the welfare losses brought about by this level of cross-subsidisation. Ideally, prices would be individually designed for each individual course. That is how it is done in state universities in the USA. That maximises the amount of welfare.
Reference was made to wrong courses and drop-out levels. This has elements of information asymmetry. It is also a question of avenues of progression. I know that other parts of the Department of Education and Skills are examining alternatives in apprenticeships and structures with the object of bringing people from levels 6 and 7 into levels 8, 9 and 10.
I noted the point that the movement of cost in education has in part been a function of access to debt. The increases in prices in the USA and the UK have been functions of the fact that they do not produce sticker shock. Due to the fact that we do not have a fully operational market in Ireland, we cannot easily determine what the price elasticity and income elasticity in respect of different prices for higher education would be, since other jurisdictions have a fully operational supply and demand function with prices.
Reference was made to the proposal being the Irish Water for education. That is a slightly problematic comparison. I would say that-----
Dr. Charles Larkin:
I would say the key thing to learn from Irish Water is that Irish Water began life as an off-balance sheet exercise that was going to be perfectly okay with the Europeans. Then it fell apart quickly when there was not enough revenue coming in. The lesson from Irish Water is to have a belt-and-braces approach to repayment. That is to be noted.
Another question was raised about adaptability. That is a question of internal governance and reform within the structures of the organisation. Accounting issues and other matters related to the performance of the higher education sector have been reviewed on multiple occasions at the Committee of Public Accounts. Various positive and negative aspects of these have been outlined at that committee as well as by the Comptroller and Auditor General. I would refer this committee to the Comptroller and Auditor General and the Committee of Public Accounts in this regard.
Dr. Shaen Corbet:
There were many questions. I will do my best to go through them quickly. Deputy Byrne referred to excessive pessimism. Our supporting document presents the figures of the UK income contingent loan system in the context of student loan companies. The information is contained in table 1 on page 14. Let us consider one of the first years when there were more than 250,000 students. For example, 2003 has 271,000 students. We have combined all the figures from Northern Ireland, Wales, Scotland and England in respect of that cohort. At present we have a figure of 42.5% repayment. That is quite successful. It is a good system at that stage. What we have in this system is 29.2% above the threshold who continue to pay at present. We also have 13.2% below threshold. What we are seeing across the board is that 57.5% have not paid the money some 13 years later. That is on the record from the UK. That is the estimate.
I want to touch briefly on one point that Dr. Larkin made. I thought it was incredible when I discovered it myself. The Chairman made a comment about the bailiffs and sheriffs coming in the door. There needs to be a whip at some point to get debt back in terms of the banks and what actually happens.
I do not mean that we send sheriffs and people to knock on the front door. If one openly tells someone who owes one money that one will not chase the debt, it is a big issue. I do not know what strategy to adopt there. If someone is on the west coast of America and they do not respond to letters from the Irish Government, it will be up to the Government to go to them to get the money back. That is a big issue. We have seen an issue develop within the New Zealand ICL system to the tune of NZ$1 billion, which is a considerable sum. It has been developing over time. Our submission includes figures for the age of overdue payments and they show that for the periods of between one to two years, two to five years and longer than five years, there is more than NZ$700 million in long-term arrears without any response. It was reported in December 2016 that a crackdown on student loan borrowers identified 57,000 New Zealand students living in Australia where two-thirds were in default. These people simply were ignoring contact from the New Zealand Government. That is a big issue.
We were asked about the next crisis. After Brexit, for example, there could be a disastrous situation if an ICL system was brought in with that amount of instability in the Irish economic environment.
What are the implications for mature students? So far, we have been taking the answers for someone coming straight out of school and into third level education but what about someone who comes into education later, in their 30s or 40s, for instance, having raised children, or are going in part time? Will they have to pay as big an amount?
Dr. Charles Larkin:
On those returning to education, because the modelling we have done looks to a 20-year earning horizon, there is the capability for somebody to take out an income-contingent loan and work under this function but if they are to repay it, they would have to be in a very high earning capacity position after they complete their studies. In general, if one looks at what higher education will look like in the future, the traditional student will be a smaller part of that picture than is the case at present. Many assumptions will have to be rethought about both how the HE system works and the financing of it. That is not something we looked at very extensively. It is something we do need to look at because the demand for higher education in the future will be more about people plugging in and out rather than getting one bloc of education, walking away aged 25 years and never looking at it again. The average student who comes in to third level in 2020 will probably have at least three or four encounters with post-secondary education before they reach retirement age in their mid-70s.
Dr. Aedín Doris:
Initially when the ICLs were introduced in the UK, part-time students were not covered and that was a big problem. That was the reason the numbers collapsed. Part-time students are included now but they still have not got it right as it does not allow for modular courses. I completely agree that coverage for part-time students needs to be very carefully looked at because we do not want to discourage that.
I am conscious of time because some of us are speaking in the Dáil shortly. I thank the four witnesses for their attendance and contributions. It was an insightful debate and it was worthwhile to have two directly opposing views on what is a very difficult subject. It was a very productive session and we all learned a lot from their insights and observations. We look forward to engaging with the witnesses and I hope that we might revert to them if the members have further questions.