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© 1993 International Bank for Reconstruction and Development / The World Bank

research-article

STUDENT LOANS: AN EFFECTIVE INSTRUMENT FOR COST RECOVERY IN HIGHER EDUCATION?

Douglas Albrecht and Adrian Ziderman

Governments and universities have trouble reconciling the goal of keeping higher education widely accessible with the need to retrieve some of its costs from students. Student loans offer a plausible solution to the problem. But loan programs turn out in practice to have been a disappointing instrument of cost recovery: analysis of twenty-three programs found that students repay only a small portion of the value of the original loan. Subsidies, high default rates, and high administrative costs have eroded the value of repayments. Sometimes loan programs have proved as expensive as outright grants.

This article argues that most loan programs could be reformed to improve financial effectiveness—through targeting, charging positive real interest rates, designing repayment plans to take account of the likely pattern of graduate earnings, and ensuring that the oversight institutions can and will collect. Or governments could explore alternative devices for cost recovery, such as a graduate tax. This approach levies a higher income tax rate on beneficiaries of government-subsidized higher education and thus preserves the idea, implicit in loan programs, of paying for education with future earnings. As part of an effective tax system, a graduate tax could bring in significantly more revenue than traditional loan programs.


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