Possible Uses of Vouchers in Higher Education

Presentation by Arthur M. Hauptman

Financing Reforms for Tertiary Education in the Knowledge Economy

Seoul, Korea

6-8 April 2005

Vouchers as a public policy tool• Voucher debates are much more common in basic

education and some other government functions such as public support of housing than as a means of paying for higher education

• But in all public functions, the purpose of adopting voucher policies is basically the same: to promote greater competition among providers of a good or service by providing public support indirectly through the consumers rather than directly to providers

What constitutes a voucher in higher education?

• A number of definitions could be used to describe vouchers in higher education

• A narrow definition would include:– students and/or families receive a coupon (voucher) which represents a

certain amount of money to be used exclusively for higher education related expenses

– students carry the voucher to the institution in which they enroll, and the institution then redeems the value of the coupon from the government

• A broader definition would include:– any policy in which public funds for higher education follow the

student, not the institution

The question of vouchers should be seen in the broader context of higher

education financing mechanisms• As the following chart indicates, of the four

principal ways public support is provided for higher education - funding of recurrent expenses; investment and specific purposes; university-based research; and financial aid to students and families - two may involve the use of vouchers

• In both those cases, vouchers represent the more student oriented part of the financing spectrum in contrast to the more direct support of institutions

Institutional Recurrent Expenses

Financial Aid to Students and Families

Public Support of Higher Education for:

Capital Investments & Specific Purposes

University-Based Research

Negotiated Budgets

Formula Funding

Demand Side Vouchers

Administered by Institutions

Student Aid Vouchers

Staff Costs & Other Inputs

Enrollments& Cost per Student

Student-Based Allocations (Supply Side Vouchers)

Grants & Scholarships

Student Loans

Tax Benefits

Thus, vouchers can be used in two principal ways in supporting higher

education activities

• First, as a means of defraying all or a portion of the recurrent expenses of institutions, particularly at public institutions which by definition rely primarily on public funding to fund their operations

• Second, as a means of providing financial aid to students and their families

In developing both kinds of vouchers for higher education, policymakers must

consider and resolve a number of key issues• Do vouchers cover the full cost of education, or will tuition fees be used to

pay some of the costs?• Do vouchers cover the full public cost of higher education, or is there a mix

between supply side and demand side approaches?• Are vouchers available to all students, or only to specific groups of

students?• Are the vouchers the same amount for all students, or do students from

disadvantaged families receive more?• Are students at private institutions eligible to use the vouchers, or are they

restricted to those at public institutions?• How are seats allocated to voucher holders at institutions that are

oversubscribed?

I. Vouchers as a way of paying for

recurrent expenses • In most countries, paying for the recurrent expenses of public

institutions is the primary role of governments in the support of higher education

• The range of the financing mechanisms used around the world to accomplish this goal is shown in the following chart, which show a range of policies including:

• centralized, regulatory approaches compared to decentralized, market-based policies

• institution-oriented/supply side policies compared to more decentralized, student-oriented policies

• Input-based funding compared to performance-based approaches

MEANS OF PAYING FOR RECURRENT EXPENSES

MORE TRADITIONAL APPROACHES INPUT ORIENTED

CENTRALLY PLANNEDHIGHLY REGULATED

SUPPLY SIDE DEMAND-DRIVENINSTITUTIONAL STUDENTORIENTATION ORIENTATION

OUTPUT ORIENTED MORE INNOVATIVE DECENTRALIZED APPROACHES MARKET-BASED

FORMULAS BASED ON STAFF LEVELS & OTHER INPUTS

FORMULAS BASED ON ENROLLMENT LEVELS & COSTS /STUDENT

NEGOTIATED BUDGETS

STUDENTS TAKE COUPONS TO INSTS WHICH REDEEM THEM (DEMAND SIDE VOUCHERS)

PERFORMANCE CONTRACTS(REGULATORY AGREEMENTS)

FORMULAS BASED ON STUDENT CHARACTERISTICS (SUPPLY SIDE VOUCHERS)

PERFORMANCE SET ASIDES (INSTS COMPETE FOR FUNDS)

PAYMENTS BASED ON STUDENT PERFORMANCE AND OUTCOMES

Vouchers can be seen in the context of different ways to pay for recurrent expenses,

including:

• Negotiated budgets - government and institutional officials negotiate over the amount of funding

• Formula funding - now the most frequent type of financing mechanism, funding formulas range from those based on inputs such as staff costs to ones which are based on performance measures

• Demand side vouchers - represent the most demand-oriented, market-based way of paying for recurrent expenses

Demand side vouchers are so innovative that there are few examples of countries

that use them to pay for recurrent expenses• Colorado is in the process of implementing a voucher

scheme to pay for a portion of the recurrent expenses of undergraduates

• Colorado will complement the undergraduate vouchers with two other policy interventions that are shown on the previous chart– Payments for student performance and outcomes in which insts

will be paid for the number of graduate and professional school students they enroll and graduate

– Performance contracts - regulatory agreements between the insts and state government

Comparing demand-side vouchers to more traditional ways of funding

recurrent expenses• Strengths– Introduces more competition among insts into the funding of recurrent

expenses, thus increasing system efficiency

– Expands choice of students, thus encouraging greater access and private sector development

– If differentiated by income, can help improve equity

• Weaknesses– More difficult to administer than traditional approaches, thus possibly adding

to system inefficiency

– Not well suited for dealing with nontraditional groups of students including older students and distance learners

– If not differentiated by income, vouchers can decrease equity

Student-based formula allocations (supply side vouchers) represent an alternative to demand side vouchers

• Demand side vouchers are an alternative to the traditional approach of using enrollment-based funding formulas to pay for recurrent expenses

• Supply side vouchers represent another alternative to traditional enrollment-based funding formulas – they occur when all or a portion of formula funds are

allocated to institutions based on individual student characteristics or performance rather than the number of students enrolled

As with demand side vouchers, there are relatively few examples in which supply side vouchers have been implemented or

even seriously proposed• England pays a premium in its funding

formula for students from postal codes with high concentrations of low income students

• Jordan and the Palestinian National Authority have proposed or are considering allocation schemes based on student characteristics– These funds might then be targeted for use as

grants or loans for targeted groups of students

Strengths and weaknesses of supply-side vouchers compared to demand

side vouchers• Strengths of supply side vouchers

– Easier to administer than demand side vouchers

– Easier to adjust prices paid to institutions for seats to encourage greater relevance

– Can also be used to pay institutions more for student performance, thereby encouraging greater throughput

• Weaknesses of supply side vouchers– Are not good in encouraging private sector development and lifelong

learning, including distance education

– Do not create as much of a sense of student choice and competition for funds as demand side vouchers

II. Student aid vouchers

• Another way in which vouchers can be used to fund higher education is as a means of providing financial aid to students and families

• In this regard, vouchers can be contrasted with more centralized student aid programs in which students apply directly to government once enrolled in an institution,or that use institutions to administer funds, usually within government guidelines

• The range of student aid administration options are shown in the following chart

METHODS FOR SUPPORTING STUDENTS AND FAMILIES

MORE TRADITIONAL CENTRALLY PLANNEDAPPROACHES HIGHLY REGULATED

SUPPLY SIDE DEMAND-DRIVENINSTITUTIONAL STUDENTORIENTATION ORIENTATION

DECENTRALIZED MORE INNOVATIVEMARKET-BASED APPROACHES

STUDENTS APPLY TO GOVT AGENCIES FOR FINANCIAL AID ONCE THEY ADMITTED TO AN INSTITUTION

STUDENT AID ELIGIBILITY LINKED TO FUNDING FORMULAS BASED ON STUDENT CHARACTERISTICS

AID PROVIDED TO STUDENTS OR FAMILIES IN THE FORM OF STUDENT AID VOUCHERS

INSTS ADMINISTER AID PROGRAMS ACCORDING TO GOVT RULES

TAX BENEFITS FOR HE CURRENT EXPENSES AND SAVINGS

Examples of countries where student aid is provided as vouchers

• U.S.– Pell Grant program - students receive need-based vouchers on the basis of

centrally calculated financial assessment

– GI Bill - student aid provided on basis of military service • France

– Students at public and state private insts eligible for social grants based on student’s and parents’ income

• Similar voucher systems used in some Francophile countries

• Denmark – All students receive up to 70 monthly vouchers to cover living expenses

related to higher education attendance– Students can save vouchers and ‘double up’ near graduation

Conditions for Success of Student Aid Vouchers

• Student aid vouchers require strong governmental structures to succeed– Administrative requirements are high

• Good quality assurance procedures must be in place to prevent the proliferation of low quality institutions in response to vouchers

• Good information systems must be in place to allow students to take advantage of real choices afforded by vouchers

Comparing Student Aid Vouchers to Institutionally Administered Aid Programs

• Strengths of Student Aid Vouchers– promote competition for funds as student aid funds follow

the student not the institution

– therefore provides students with greater choice of institution

• Weaknesses of Student Aid Vouchers– Vouchers tend to entail higher administrative costs than

decentralized programs that institutions administer

– Student aid vouchers tend to be more complicated to administer than institutionally administered aid

Concluding Remarks• For both the funding of recurrent expenses and the

provision of student aid, vouchers represent a promising way of introduce more competition into the financing of higher education

• Both types of vouchers have the potential of improving equity and efficiency of higher education systems

• Strong governmental structures, adequate systems of quality assurance and sufficient student information are essential to the success of both kinds of vouchers