January 5th Links

1. For those interested in maximum likelihood estimation techniques, Vincent Granville discusses the method of steepest ascent in relation to Google's search algorithm.

2. The Economist: "Only a few fast-developing countries, such as Brazil and China, now seem short of PhDs."

3. U.S. Council of Graduate Schools: The Ph.D. Completion Project

4. Yesterday it was announced that Irish property prices fell back to 2002 levels in 2010, according to reports from MyHome.ie and Sherry Fitzgerald; so it is interesting to read this SSISI paper (2007) by P.J. Drudy which "argues that Ireland’s housing problems stem in part from a particular philosophical orientation which supports the 'commodification' of housing".

5. The (U.K.) Royal Statistical Society "Get Stats" Campaign: 'giving everyone the skills and confidence to use numbers well'.

6. Researchers at Harvard have found a way of using the iPhone to measure people’s moods and have found a correlation between daydreaming and unhappiness.

7. The new Happiness Index to gauge Britain's national mood.

8. The regional impacts of Northern Irish HEIs.

9. Tom McKenzie and Dirk Sliwka: Universities as Stakeholders in their Students' Careers: On the Benefits of Graduate Taxes to Finance Higher Education.

10. CNN Money: Should companies offer sabbaticals?

11. Damien Mulley: "Failure" and Enterprise Culture in Ireland.

Irish Policy Options for New Student Contributions in Higher Education

Readers may or may not be aware of this report to the Irish Minister for Education and Science: "Policy Options for New Student Contributions in Higher Education". The report dates from July 2009 but I have just found it on the website of the recently re-branded Department of Education and Skills. It is not clear whether this report is connected to the National Strategy for Higher Education in Ireland, recently discussed by Kevin on this blog.

In any event, the report outlines a number of issues in it summary, which are relevant to the potential introduction of a student contribution in Ireland. These include:

(i) Affordability considerations: "It is proposed that the level of any new student contribution should be related to current fee levels for Irish/EU students who do not qualify for free fees."

(ii) Top-up Fees: "Consideration could also be given to providing for a premium or ‘top-up’ range within which individual institutions would be free to increase charges for particular programmes. This would allow individual institutions to incentivise participation on particular programmes or to generate additional revenue according to their ability to compete for students. Such an arrangement could have the benefits of promoting competition and quality within the system."

(iii) Transition: "In transitioning to new fee arrangements, it would be important to avoid any potential for immediate shortfalls in institutional budgets by pitching fees at levels that do not match current ‘free fee’ contribution rates."

(iv) Collection of loan repayments: "The involvement of the national tax collection agency has been identified as being a critical success factor for a number of income contingent student loan facility models that operate internationally... It is recognised, however, that there are significant operational pressures on the Revenue Commissioners in the current Irish context which would limit their capacity to take on a role of direct collection agent for an income contingent loan scheme."

(v) Public finance: "In the current economic circumstances, it would be important that the introduction of a student loan facility would be designed to minimise any impact on the General Government Balance (GGB) or on General Government Debt (GGD)."

(vi) Upfront payment and tax relief: "In the context of any introduction of a loan system, continuing tax relief for students who pay fees upfront would amount to a form of discount for upfront payment. From an equity perspective, this would need to be factored into any consideration of the appropriate rate of surcharge on those availing of a loan rather than paying upfront."

(vii) Communicating complex issues: "Any policy change in this area will impact on significant numbers of students or potential students. A number of the options being considered are complex in nature and would give rise to very significant demands for information and clarification. An information strategy will need to be in place to communicate the details of any changes and to provide user friendly access to relevant detail on how the changes impact on individuals."

Policy Options for Student Loans in the USA

A recent study from the United States Congressional Budget Office, Costs and Policy Options for Federal Student Loan Programs (March 2010), "compares the budgetary and fair-value costs of the (exisiting) federal student loan programs. It also looks at several options for modifying those programs, including eliminating the guaranteed loan program after July 1, 2010, and expanding direct lending." (In keeping with CBO’s mandate to provide objective and impartial analysis, this report makes no recommendations).

Links: 19th July 2010

1. "Avoiding a Lost Generation: How to Minimize the Impact of the Great Recession on Young Workers": Testimony before Joint Economic Committee of the United States Congress on May 26th, 2010. By James Sherk: Senior Policy Analyst in Labor Economics at the The Heritage Foundation.

2. "The Kids Aren’t Alright — A Labor Market Analysis of Young Workers": Kathryn Anne Edwards and Alexander Hertel-Fernandez (Economic Policy Institute): EPI Briefing Paper #258, April 7, 2010.

3. The Browne Review (or the Independent Review of Higher Education Funding and Student Finance) is a panel which will consider the future direction of higher education funding in England. It was launched on the 9 November 2009 and is being chaired by Lord Browne of Madingley, the former chief executive of BP. Wikipedia provides additional information.

4. "Policy Watch: Income-Contingent College Loans": Alan B. Krueger and William G. Bowen, The Journal of Economic Perspectives, Vol. 7, No. 3 (Summer, 1993), pp. 193-201

5. ESRI Higher Education Policy Conference: "Higher Education Policy: Evidence from Ireland and Europe". Venue: The ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2. Date: 16/11/2010.

6. David Willetts MP, the UK universities minister: "If You Can't Get a Job, Start a Business", Guardian: 16th July 2010.

7. On a lighter note, one for Dr. Kev: "Irishmen prefer to be single, survey shows". "Lee-Ann Burke, a lecturer in economics at University College Cork , said the study contradicts other surveys showing men happier being married."

8. Google Offers OCR: when you import files into Google Docs (JPEG, GIF, PNG, or PDF) you have the option of running optical character recognition on them.

9. The Turbulence Ahead blog got a makeover.

10. Finally, here's a video of Pete Lunn (ESRI) speaking at the Irish Economics and Psychology event last November, on "A Computational Theory of Exchange". Thanks to Karl Deeter for organising the video; if you follow this link, you will see other talks from the event by Marcel Das, Stephen Kinsella and Jonathan Murphy.

Failure Insurance

Yesterday's Chronicle of Higher Education reports on a working paper that was presented in Atlanta last week at the annual meeting of the American Economic Association. Chatterjee and Ionescu state that the dropout rate among U.S. college students is between 33 and 50 percent. In a theoretical framework, the authors examine whether insurance against college-failure risk can be offered, taking into account moral hazard and adverse selection. They find that optimal insurance raises the enrollment rate by 3.5 percent, the fraction acquiring a degree by 3.8 percent and welfare by 2.7 percent. In practice, students who drop out would get a portion of their student loan reimbursed.

In the U.K., by contrast, there is no risk associated with "taking out a student loan but failing to earn a degree". As mentioned on this blog before, the income-contingent loan scheme in the U.K. works as follows:

- repayments do not start until April of the year after students have completed their course
- repayments do not start until the student is earning more than 15,000 pounds
- the repayment is 9% of gross salary
- the repayment is transacted as an automatic deducation (through PAYE though this could as easily be a direct debit)
- there is no particular schedule for clearing the debt, but, if it has not been cleared 25 years after repayment began, or if the student turns 65 years old ---- then the remaining debt will be cancelled

Chatterjee and Ionescu were interviewed in the Chronicle article and asked "Why could an insurance system be superior to the kind of income-contingent repayment schemes that Milton Friedman favored?" The authors responded that the insurance scheme is not likely to be affected by moral hazard. "The reason is that the gain from obtaining a college degree is pretty large in expectation, and most students will not want to stop working hard in college simply to get a portion of their student loan reimbursed when they fail. In contrast, we believe Friedman's proposal ties repayment to earnings. His scheme would lower repayment when income is low, which gives an incentive to cut back on effort (just to lower payment on the student loan)."

It appears that the U.K. student loan scheme avoids any instance of the moral hazard problem that Chatterjee and Ionescu are concerned about. With the repayment set at 9% of gross salary, a graduate could lower the level of re-payment by deliberately earning a lower income. However, deliberately earning a lower level of income would also reduce the graduate's level of consumption. It appears that there is no disincentive to maximise earnings for graduates that avail of the U.K. student loan scheme. Finally, college-entry may be more likely under income-contingent loan schemes, such as the U.K. student loan scheme. In a "failure insurance" scheme, such as the one outlined by Chatterjee and Ionescu, students who drop out only get a portion of their student loan reimbursed. So they end up in the position of having no qualification, but still paying off some amount of debt.

* Readers may be interested in the Student Lending Analytics Blog.

Grants or Loans?

Grants or Loans? Theoretical Issues Regarding Access and Persistence in Postsecondary Education

Lorne Carmichael, Ross Finnie; 2007

Abstract:

Most economic investigations of access to education treat an investment in college or university as if it were a financial investment offering a particular expected rate of return. Since the average measured rates of return are quite favourable, other factors such as lack of information, contrary parental influence, or "debt aversion" must be invoked to explain the unwillingness of some qualified students from poorer backgrounds to borrow money and attend. However, a model that recognizes the hardship associated with low levels of expenditure suggests that, ceteris paribus, poorer students will actually need a higher measured rate of return before they will decide to attend. The result holds even when there is an efficient student loan system. This approach can provide some normative guidance for decisions about the choice of grants or loans as vehicles for student aid, and has positive implications about the effects of grants and loans on access and persistence.

Impact of Financial Support on Study Duration and Success

The Economic Logic blog links to research on the impact of financial support on study duration and success. Daniela Glocker (DIW Berlin) uses German data and finds that the source of support matters. Institutional student aid leads to shorter study duration than, say, support by parents. The amount of financial support has no impact on duration, but improves the probability of successful completion of studies.

The Time Value of Exchequer Funding, and the Fees Debate

In an article in today's Irish Times, Sean Flynn reports that parents will get a discount of about 20 per cent for those who pay upfront – in order to generate funds for the exchequer in the short term. This is in the context an "income-contingent loan scheme" for financing higher education, a being considered by Minister for Education Batt O’Keeffe.

"At present, the State pays €350 million to the third-level system in lieu of fees each year. Sources say the plan to offer a discount of about 20 per cent for upfront payments could yield €70 million."

The article doesn't say, but I assume that 'paying upfront' means paying fees at the start of each academic year, rather than paying fees for an entire course at the start of the course. A question that parents with cash may ask themselves at the start of each academic year is "Can I earn 20 percent (risk-free) on this lump-sum over the next year?". I would be very surprised if anyone answered yes to this question (even in boom times), so it seems like a highly-loaded incentive scheme, in relation to the time value of exchequer funding.

In relation to the wider debate on the financing of higher education, Richard Layte, Selina McCoy and Philip J O'Connell (from the ESRI) have an article in last Friday's Irish Independent which argues that college fees are a minor part of the story (if the objective is to increase participation by low-income students). They mention the importance of investment in early childhood education (as discussed by Prof. James Heckman in the lecture linked below), the eligibility of and level of maintenance grants (mentioned recently on the blog here) and the need for quality Access programmes at third-level (which relates to one of Geary's evaluation projects).

Should Irish Students Turn Their 'Free-Fees' Campaign Towards Higher Education Grants?

Yesterday the HEA published the third Eurostudent Survey to be conducted in the Republic of Ireland; the report is available on the HEA website here. There is a short discussion of the report in today's Irish Independent (here), which quotes the report saying that "there are substantial negative effects of working beyond 20 hours per week. Up to this point, the effects of working extra hours do not seem to be important." Other findings are that:

- Some 65pc of students earn at least some income from employment
- Students' spending averages €1,086.64 per month
- The most popular job held by students is shop assistant, followed by working as waiters or waitresses and then bar staff

The third Eurostudent Survey reports on 2007 field-work that was conducted here with colleagues at the Geary Institute. Now we are at the start of 2009 - and with economic recession underway - the concern of working more than 20 hours a week during college is mostly a thing of the past. Despite this, student expenditure costs of approximately €1,000 a month (or €12,000 a year) still have to be financed. So average living costs of a four-year undergraduate degree are circa €50,000, and somehow they must be paid.

According to a report in today's Irish Times, over 20,000 students are expected to take to the streets of Dublin tomorrow to oppose the reintroduction of third-level fees, and to highlight the role they feel education should play in any economic recovery plan. It might be the case that a better use of the protest would be to re-direct the campaign towards a call for improved higher education grants.

The rationale for this stems from the unemployment problem that students now face. Instead of worrying about whether they are working too many hours, or wishing they had a handier number, many students are now lucky to have any job at all. A discussion on this issue is provided by Bridget Fitzsimons in the current edition of the UCD University Observer: "No part-time means full-time trouble...". "Student Advisor, Aisling O’Grady has noted 'a definite marked increase' in those visiting (UCD) Student Advisors for financial advice after being unable to find employment." For any students in severe financial difficulties, some options for advice and support are mentioned in the article. One comment about the new conditions facing students is provided by Juan Houlihan in 1st Arts:

"...I couldn’t go home every weekend for work, and I thought it would be easy to find work in Dublin. I’ve looked in a lot of places, but nowhere will even look at CVs. It’s difficult, and if I didn’t have grants to cover some expenses, I’d be in a lot of trouble. It’s hard to get through college..."

With the uncertain and unlikely prospect of getting a part-time job to cover living costs during higher education, students would gain considerably from an improved higher education grant. This could be a preferable option if there were to be an either/or scenario between 'free frees' or 'improved grants'. The re-introduction of fees in the context of an interest-free student loan system has been tabled by the Minister for Education, Batt O'Keefe. An interest-free lending initiative would mean that students would not have to worry about the cost of their higher education until they have secured post-graduate employment and are earning above a certain level of salary. In a detailed discussion of interest-free student loans on this blog, it was previously noted that the UK student loan system has the following features:

- repayments do not start until April of the year after students have completed their course
- repayments do not start until the student is earning more than 15,000 pounds
- the repayment is 9% of gross salary
- the repayment is transacted as an automatic deducation (through PAYE though this could as easily be a direct debit)
- there is no particular schedule for clearing the debt, but, if it has not been cleared 25 years after repayment began, or if the student turns 65 years old ---- then the remaining debt will be cancelled

In fact, the UK student loan system is a really good offer. Though it does mean that British taxpayers (particularly those that do not get the chance to attend higher education) sacrifice the time-value of their tax-pounds. In other words, they stump up cash so that other people can get a higher education. The money might otherwise be spent on things such as better policing, better healthcare or better primary school services. What's more, the loans on offer are subsidised by taxpayers so that there are some tax-pounds that will never go towards other public services. (What this means is that there really is no such thing as 'free fees' - as somebody else will pay the cost!). All that being said, the recipients of interest-free student loans shouldn't feel so bad, as there is such a thing as non-private returns to education (in other words, externalities - including more tax revenues for govt.).

So, it may be the case that some students would prefer to have 'interest-free student loans' as well as 'improved higher education maintenance grants', rather than just maintaining the status quo of 'free fees'. At present, to get a full maintenance 'grant' of €3,420, the maximum income limit for a family of four children is €38,675 a year. For more than eight children, it is €46,140 a year. Former education minister Niamh Bhreathnach, who abolished tuition fees, admitted she was disappointed at these figures. For more on the 'grant' and its history, see this previous blog post.

What we do know is that the annual maintenance support of €3,420 seems very low, and that it falls very far below the €12,000 that students are estimated to need for their annual expenditure (see Eurostudent 3). Without part-time employment opportunities to cover the difference, will every student comtinue to attend college? Furthermore, what about the students who are not entitled to a grant but can't get a part-time job? That is, those students from a four-kid family with an income above €38,675? A Geary working paper from 2007, "Household Characteristics of Higher Education Participants", suggests that eligibility for maintenance grants is an important factor for encouraging particpation in higher education.

All of this leads to the suggestion that a better use of tomorrow's protest would be to call for interest-free student loans and improved higher education grants (improvements to both the amount of the payment and the level of family-income at which the grant is payable). All that being said, 'interest-free student loans' combined with 'improved higher education grants' is a much more expensive prospect for the government compared to simply introducing interest-free loans, or for that matter, simply re-introducing student fees.

One thing is for certain, if the 'free fees policy' is definitely on the way out (and the govt. deficit is certainly putting this on the agenda), then students would be better served lobbying for an interest-free loan system rather than protesting against the inevitable. What might be needed now is some thought on how to generate short-term finance for interest-free student loans (and perhaps even improvements to grants). One suggestion is to issue ring-fenced special savings bonds. These bonds would bear interest in the same way as any other Irish govt. bond; however, the buyers of these bonds would also know that they are generating cash-flow to support Irish higher education.