Economic survey of the United States 2007: Financing higher education

 

Contents | Executive Summary | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise Chapter 6 of the Economic survey of the United States, published on 29 May 2007.

Contents                                                                                                                          

Enhanced student loans would improve access to college

The US higher education system is one of the best in the world. However, one problem it faces is that many potential students cannot complete college because of inadequate preparation or financial resources. Despite the expenditure of considerable government funds through direct provision, grants, tax concessions and loans, significant financial barriers to access still exist. Student loans provide the most efficient and equitable means of overcoming these barriers. The loan programme in the United States compares favourably with those in other countries, although there is room for improvement. Most important, student loan limits should be raised substantially, especially for unsubsidised direct loans, so as to cover the full cost of study, including living costs. Doing so would benefit students and promote access at little cost to the government. While it might encourage further increases in tuition fees, this is a likely effect of any measure to ease access barriers. To assist risk averse students, repayments should vary with income. Such an option already exists but is little used, partly because of a lack of information. Accordingly, the default repayment plan should be income contingent, and borrowers who are risk averse should be advised that they will be better off with that option.

Less cost-effective forms of government assistance should be reduced

Were a good student loan system in place, with high limits and income contingent repayments, the rationale for means tested “Pell” grants, which are favoured by the Administration and many policymakers, would be greatly weakened. In contrast to loans, grants involve large fiscal costs, redistribute money to those with high lifetime incomes, and appear to be of doubtful effectiveness. There remains some scope for grants in dealing with informational problems and externalities, but this would probably involve fewer payments. The Administration is to be commended for planning to simplify the application process for financial aid. This should include removal of unimportant means testing criteria and abolition of the asset test. Tax concessions for higher education benefit middle and upper income families, rather than those on lower incomes where the main barriers to access are. Accordingly, they are an inequitable and cost-ineffective means of promoting access. They interact badly with the financial aid system. Most important, they are complicated – so much so that many eligible tax filers do not claim them. These problems outweigh the theoretical advantages of the concessions. Accordingly, these tax concessions should be simplified, or even abolished. Finally, with a good system of student loans, state government subsidies would no longer be necessary to promote access. However, perceived social benefits from higher education would justify retaining some level of government support.

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.

The complete edition of the Economic survey of the United States 2007 is available from:

Additional information                                                                                                  

 

For further information please contact the US Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by Hannes Suppanz and Peter Tulip under the supervision of Patrick Lenain.

 

 

 

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