Authors: Shiro Armstrong and Bruce Chapman, ANU
Access to university education and affordability of tuition are important to any advanced economy. Japan is not alone in facing major challenges on both fronts. In some countries like the United States, urgent reform is needed as the lack of access to and affordability of higher education increases inequality in society and creates hardship for many graduates.
The income contingent loan (ICL) system for financing higher education provides an innovative solution. This general idea was conceived by the economist Milton Friedman to overcome the market failure that banks won’t offer loans to students. First implemented in Australia and adopted now in England, New Zealand, Hungary, the Netherlands and South Korea, among other countries, it is designed to improve access to university for all students; limit the burden on the government budget; avoid hardship for graduates and be fairer for society.
Most countries subsidise university tuition because of its external benefits to society. But high or full subsidisation comes at a large cost to the government. And students from high income backgrounds receive much of the benefit at the expense of ordinary taxpayers. Unsurprisingly, those who are fortunate enough to attend university on average earn more in the future. So it is reasonable to expect them, rather than all taxpayers, to pay for that. Full subsidisation is very expensive for the government and is simply inequitable, a point now widely recognised and accepted.