Tag Archives: Milton Friedman

Higher Education Reform

This is a follow-up piece to an earlier post, The Wrong Solution to the Right Problem.

At the start of every academic year, the lenses of the media are trained on the educational system. A lot of focus is paid to the rising cost of tuition particularly at higher education institutions (HEIs) and state universities and colleges (SUCs). Legislators take advantage of this attention often by sponsoring bills that seek to provide scholarships to “poor but deserving students”.

This led me to dig up all the pending senate bills at the 15th Congress where if you visit their website and do a search by using the word “scholarship”, you will find that there are 19 such bills (excluding the latest one, which I picked apart last week). All but four of these bills were filed in the month of July near the start of classes (what a coincidence).

To give you a bird’s eye view of the proposals, I would like to offer the following table which itemizes each bill’s intended beneficiaries, their sources of funding and authors/sponsors:

Scholarships provided for Sponsor: SB# Source of Funding
Top 5% of high school seniors and all graduating students of science high schools Juan Ponce Enrile: 3074 General Appropriations (GAA) augmented by PAGCOR profits
Household helpers Jinggoy Estrada: 2910 GAA
Family members of policemen, soldiers, firemen and jail wardens Jinggoy Estrada: 2907Miriam Santiago: 2648 (for PNP only)

Manny Villar: 1153

Sonny Trillanes: 305

Bong Revilla: 26

Firearms license fees, 15% of fire code fees and 10% of CHED scholarship grants
Agricultural entrepreneurs/farmers Manny Villar: 2712 10% of the Agricultural Competitiveness Enhancement Fund
Public school teachers and their children Miriam Santiago: 2251 None
Top 30% of graduating students enrolled in pre-medical courses Ralph Recto: 2141Lito Lapid: 1000 Contingent fund and savings of Executive Branch
Poor but deserving students enrolled in state colleges and universities Bong Revilla: 1999  Manny Villar: 1259 None
Poor but deserving students in private colleges and universities Manny Villar: 1229 From tuition fee increase
National and local government officials Manny Villar: 1046Lito Lapid: 1001 Existing local scholarship programs of government and savings of agencies
Women Jinggoy Estrada: 794 GAA
Valedictorians and salutatorians of public high schools Chiz Escudero and Sonny Trillanes (jointly): 170 GAA

These bills seek to either meet a lack of qualified trained professionals and workers in some specialized area like science, medicine or agriculture, or provide access to underprivileged constituents. Majority of them are aimed at improving the compensation and benefits package of public sector employees by providing scholarships to either them or their families. Soldiers, police officers, firemen and teachers are singled out by six separate bills for this purpose.

Most of them rely on the executive to provide from the general appropriations or national budget to finance these entitlements. Those that cite specific sources of funding identify already existing sources such as profits from government corporations or fees from services charged to the public. They merely specify where a portion of these revenues are to be spent, as opposed to mandating new sources of income.

Some of them in fact identify savings as their sole source of funding making the grants entirely contingent on such savings being made. Others do not even bother to identify where the money will come from such as the ones mandating state colleges and universities to satisfy a certain quota for scholars from public schools.

In other words, what happens when these measures are signed into law is that the sponsor gets all the credit for creating the new entitlement while the government is left to scrounge around for the money to pay for it, and often gets blamed when it is unable to do so.

Meanwhile at the lower house, the name of the game is the creation of new SUCs to service the province or congressional district of the sponsoring legislator. Look at the General Appropriations Act of 2012, and you will see what I mean. Under section VIII of the GAA, you will find the budget for SUCs broken down by region and province.

Notice that some provinces have more than one SUC. Out of a total budget of 22 billion per year, a quarter of which goes to UP, you have 112 to fund. With the growing number of SUCs, efficiencies of scale are not gained, and a lot is wasted on duplicating functions and programs. With the gerrymandering of congressional districts comes the gerrymandering of SUCs and the dilution of the budget for the existing ones and their students.

The problem

The main problems besetting higher education are therefore a lack of quality, access, appropriateness and funding. The last one, funding, is what solves the first three. Legislators often aim to address a lack of access to please their electorates, but often to the detriment of quality. The executive tries to address quality and funding, but is often limited by a lack of revenue.

Part of the problem when it comes to funding is that Filipinos have a strong preference for college education. Our participation rates at the tertiary level are higher than what our economic standing as a lower middle income nation merit (see chart below). Nearly one out of every three unemployed people in the country is either a college graduate or undergraduate student.

Data from World Bank

This is in part due to the abbreviated basic educational system which only now is being corrected with the K-12 reform. Admitting students with only a Year 10 attainment has meant HEIs and SUCs have had to “dumb-down” their content which accounts for some of the decline in quality. But extending basic education to Year 12 now means that the government has to expand its conditional cash grants to “poor but deserving students” from the current 14 years of age to at least sixteen.

The challenge from here on out is to make tertiary education efficient, equitable and effective in contributing to our goal of national development. One major way the government can drive serious reforms in this sector and hit multiple birds with one stone is to examine the use of its purchasing power. The second is to look at the way students finance the payment of their fees. Allow me to explain how this works.

The solution

Part One: A new funding model

To improve state funding for higher education, we have to look at the twin components of SUC funding which are government subsidies and student fees (we leave donations and non-education related income aside). Forget what the sign says on the gates of the campus, all SUCs derive their main source of income from the national coffers. Any reference to a city, province or region has more to do with location, rather than ownership. Their governing boards are run by national officials or regional officers paid for by the national government.

Thus the entire SUC budget can be treated as one big scholarship fund. All other existing and proposed funds to promote specific students could potentially be pooled and placed under the control of a national governing board which could decide how to dispose of it. Instead of seeing the SUCs as 112 separate entities, they should be viewed as one national system. The sole exception is UP, which has its own charter.

A funding model needs to be set up wherein funding to SUCs is student based. A set of criteria for determining the subsidy rates per head should take into account program specialization, skills shortages, national priorities, and regional inflation. Eventually, the funds could be made contestable so that if students should decide to enrol at a private college, the money should be able to follow them, subject to quality standards of course. This will drive greater efficiency in the system. SUCs will be encouraged to merge and gain synergy to survive in this new environment.

Some might object that this is a little too hard. That it is much simpler to maintain the current system where the government funds teachers, facilities and equipment rather than students. I would counter by referring to the health system, where this model is already in place through PhilHealth where the government subsidizes the treatment of members through accredited health providers. Health is a much more complex environment compared to education, and yet somehow, the government is able to pull it off.

If the first leg of higher education reform is fixing the public subsidy, the second leg is financing private costs. Despite what student activists might say, tertiary education is not a universal right. To engage in it, one must possess either intelligence or resources. What I am trying to say is if a student makes it to college, he or she is already part of a fortunate few. The rest of the population actually subsidizes those that make it.

Part Two: A new financing scheme

How can we then justify poor Juan dela Cruz paying for Isko the scholar’s studies? Social returns to schooling is the answer. Less productive workers benefit from having highly productive ones in their midst. On the other hand, private returns to education, through increased earnings (compared to non-college graduates), is the reason for making the scholar shoulder part of the cost of training. To be fair to the rest of the citizenry who do not attend college, student contributions to the cost should reflect the split of public and private benefits.

In short, it would neither be sustainable nor desirable for the state to abolish student fees. Filipinos already demonstrate a strong preference for higher education anyway. Despite the low return on investment (nearly one in three unemployed Filipinos are either college graduates or undergraduates), the participation rate of the country is already high compared to other countries with similar levels of per capita income.

The second leg of reform should focus on helping those who have the intellectual capacity but lack the financial resources to finance the costs of higher education. We have already witnessed how private credit and insurance markets have sought to address this problem with varying levels of success for upper middle class families. The challenge is doing the same for poor and lower middle income families.

Milton Friedman was the first to propose providing income contingent loans to students of higher education. These loans as their name suggests allow for repayments to be contingent on the borrower reaching a certain level of income. Friedman suggested governments collect repayments through the tax office. The interest rates charged to such loans would be concessionary, not market, rates to reflect the benefits that redound to the state in terms of higher income tax collections.

A case study

To explain how this system would work, let’s look at the example of Isko, a college scholar. He has the option of either paying his fees up front at a discount or deferring them through the new scheme. Even after graduating, he will not have to start repaying this loan until he starts earning a certain level of income expected of a college graduate. Once his personal income reaches this threshold, regular repayments will be deducted from his salary similar to the way withholding taxes work. This continues until his entire loan is fully repaid.

This scheme would only work for institutions that receive government subsidies. As part of the funding model, student fees are to be regulated with a cap that is set annually. Only SUCs at first will be part of this scheme, and later private HEIs that meet quality and other conditions. SUCs and HEIs will be allowed to set their tuition fees within the band prescribed. Isko might have to pay higher fees for particular courses that are more expensive to administer, but there will be a limit to what schools can charge to students as part of this scheme.

The experience of Australia which has had this system in place since the mid-90s is that students are less sensitive to price if they can postpone payment. In fact participation rose after the scheme was introduced despite the growth in fees. The Federal government is now in the process of expanding the scheme to cover vocational education.

Admittedly, the government will still have to put up the initial funds to cover student fees, but it will be creating an asset in the form of loans collectible rather than incurring new expenses. Over time, the funds initially invested will become self-sustaining. In this manner will both the state and the students be able to afford paying for the cost of higher education.

The way forward

The challenge now is to build on the earlier reforms of the Congressional Education Commission headed jointly by Sen. Edgardo Angara and Cong. Carlos Padilla which created the DepEd, TESDA and CHEd, and the Presidential Task Force for Education jointly chaired by Fr. Bienvenido Nebres and Emmanuel Angeles which reformed basic education by introducing the K-12 system.

Reforming the way the tertiary educational system is funded and financed addresses the issues of efficiency, equity, effectiveness and appropriateness. The funding model will drive efficiency among SUCs which will have to compete with each other and with private HEIs after a certain grace period. It will put a premium on courses for which graduates are in short supply, thus making training more appropriate. The financing scheme allows fees to be raised in a more rational manner, thus allowing the system to be more effective in delivering learning at a sufficient quality standard without adverse impact to student participation.

The best time to introduce such a reform would be towards the end of the Aquino administration when a gap will exist in the system as Year 10 completers head for Years 11 and 12 for the first time rather than first year college. Although that is still a few years away, there is a lot of groundwork that has to be covered before then including taking stock of the current situation, designing the new model and consulting with relevant stakeholders.

This reform can be initiated either through the legislative or executive branches of government as shown by past reforms. It is high time that they stop treating the problem of higher education with stop gap and piece meal measures. The problem will not go away simply by ignoring it. It is time to reform higher education and to do so from the ground up.