Higher Education in all nations is becoming increasingly important: to economic growth and national competitive position within the global economy, to the cultural and civic health of the larger society, and to individual opportunities.

Higher education is also becoming increasingly expensive. Costs are being driven upward by increasing enrollments, particularly in nations such as China that are just beginning to experience enormous expansion of demand within the traditional college-going age cohort. Cost are also being driven upward by increasing per-student costs due to the need for new faculty, especially in highly competitive fields such as management, economics, and computing, as well as for new equipment, laboratories, journals, and other requirements of modern scientific research.

At the same time, also in all nations, the public revenues--that is, revenues collected by governments, either by some form of taxation or by state borrowing or state fiat--are becoming increasingly insufficient for all of the competing public needs. Such needs in China, for example, include elementary and secondary education, health care, the care of the elderly and the infirm, national defense, and the mammoth investment needs for modern water and sanitation systems, housing, roads and bridges, modern telecommunications, and other public infrastructure.

In this climate, the state must look for alternative, non-governmental revenues to support the costs of some public services, especially those like higher education that are capable of generating some of their needed revenues, and for which users or beneficiaries--in this case, the students and their parents--seem willing to pay. More specifically, we are seeing in nearly all nations increasing reliance on:

• tuition, for the support of some portion of the instructional operations of the university, and
• full payment, or fees, for the provisions of student living, principally housing and food. Such provisions have been wholly or partly subsidized by the state or university in many countries. But the trend is toward reducing or removing these subsidies, and relying more on parents directly (i.e., students living at home and commuting to the university), or on parents and students purchasing food and housing at cost, whether from the state or university or from the private market.

Throughout the world--including the industrialized West, these-called "transitional" nations that were once the Soviet Union and its East European allies, the new market economies of East Asia, the developing worlds of Africa and Latin America, and the emerging giants such as Indonesia, India, and most of all China--one can observe public universities turning to tuition and fees. This is not without controversy and often some political liability in countries where the costs of higher education, sometimes including the full costs of student living, have for years been borne entirely by taxes, often hidden from those actually bearing the burden, and to the very great advantage of some of the more affluent, influential and vocal citizens. But the tuition and fees bring not only desperately-needed revenue, but also greater efficiency and responsiveness of the universities, along with what many economists and policy analysts claim to be greater equity in the shifting of the cost burden more upon those who reap the benefits and who are also more likely to be able to afford the costs.

Therefore, many nations have moved to lower or eliminate the subsidies to student living arrangements. More nations, China among them, are also imposing some tuition to supplement the tax support of the operating expenses of the state universities. And many other nations, including Japan, Korea, the Philippines, Brazil, Chile, and the United States, enjoy the benefits of robust private sectors of higher education, with even greater reliance on tuition and commensurably less cost to the government or taxpayer.

Factors encouraging an increasing reliance on tuition and fees in China include:

• the extraordinary competition for the limited state tax dollars from needs in public infrastructure, basic education, health, and defense;
• limitations on the tax-raising capabilities of both the Central and Provincial governments, especially to tax, efficiently and productively, income, property and sales;
• growing personal incomes in China, coupled with the acceptance that higher education brings substantial private benefits to the student;
• small numbers of children per family, coupled with an acceptance of mutual family obligations, making most families both willing and able to contribute at least something to the higher education of their children; and
• the blessing of the concept of tuition by the State and the Party.

At the same time, the use of tuition and fees in China has some problems or limitations not encountered in all nations. Among these problems are:

• the Marxist-Leninist-Maoist tradition of most pubic services being supplied by the state, even those such as higher education that were not accessible to most of the population, even though official party doctrine now supports sharing the costs of higher education, including tuition.;
• the limited cash incomes, still, of most Chinese families;
• the absence of well-developed traditions and mechanisms of personal credit to form a context for the introduction of long-term student loans;
• the lack of reliable income reporting or other mechanisms for determining, efficiently and fairly, the financial needs of parents with lower incomes, who are less able to bear the costs of tuition or fees and who therefore need financial assistance in the form of scholarships, grants, or other subsidies; and
• the lack of private alternatives in the vicinity of most universities for the provision of alternative private student living arrangements.

Nonetheless, some increased reliance of tuition for at least partial support of institutional costs of instruction, and probably considerable reliance on fees for the costs of student living, seem to be inevitable. But with this increasing reliance on tuition and fees must come financial assistance in the form or forms of:

• need-based grants, to supplement the cash incomes of poorer families and to make up at least part of the contributions that can be expected to come from more affluent families;
• scholarships, based not on the financial need or low income of the parents, but on the academic potential, or actual performance, or in some other way on the academic merit, of the student;
• loans, to enable students, very few of whom can be expected to have any income or property of their own, to bear a portion of the costs of their university education through loans, repayment of which will naturally come from their future earnings (presumably higher because of their university education); and
• possibly some form of part-time paid work or contributed services.

The remainder of this paper will discuss some key issues that Chinese universities and the Chinese higher education ministries, both National and Provincial, might consider as they attempt to formulate rational and effective policies governing the combination of tuitions and fees, to supplement tax-based, revenues, and financial assistance, to ameliorate the barriers to access or other problems that may be caused by the imposition of these tuition and fees.

1. By what principle or principles are the costs of instruction and of student living to be divided among the parent, the student, and the state, or taxpayer? More specifically to the subject of this paper, what are the principles for some substantial portion of these costs being borne by students and/or parents, thus giving rise to the need for policies regarding both tuition and fees and financial assistance?

The most commonly cited principles underlying tuition and fees are four:

1.a. Equity, or Fairness. Because the costs of higher education are borne in some way by people--either the general population through taxes or the loss of purchasing power from government borrowing or fiat money, or by the recipient students and their parents--it is more equitable for the costs to be borne largely, or at least in substantial measure, by the recipients, since they will receive most of the benefits. The more such benefits of life--e.g. income, status, and opportunities--vary among the population according to the possession of higher educational degrees, the more equitable it is for the students who possess these degrees (and their parents) to pay a considerable portion of their costs.

Chinese Governmental and Communist Party doctrine has officially accepted the appropriateness of tuition. As expressed in a passage from the Chinese Central Educational Science Institute in1990:

1.b. Efficiency and Responsiveness. The need for universities, or even for divisions within the universities, to attract students in order to bring in the necessary resources, coupled with alternative providers competing for these same students, should lead the universities or their sub-units to provide better products and services at lower costs. (This may be especially true of the costs associated with student living--i.e. housing and food.)

1.c. Student Effort. It has been suggested that students who have to pay for a portion of the higher educational costs will take their studies more seriously and complete their studies in a more timely manner. By way of contrast, in countries where all higher educational costs are borne by the state, and especially where the time to the degree is largely to the student, undue prolongation of study has become a problem and a contributor to higher costs that must in turn be borne by the state.

1.d. Necessity and Capacity. Although not a principle, per se, most public treasuries have insufficient revenues for all of their public needs, and universities, unlike many other claimants on public revenues, have an ability to raise revenues themselves.

All of these factors are present in China in the mid1990's, and tuition in China is a fact and is destined to grow. The Beijing Review reported more than 200 Chinese colleges and universities (about 20 percent) charging tuition of at least 1000 Yuan, in addition to various other fees, and that "...most colleges and universities will introduce the new [tuition] system by1997, with all having done so by the year 2000.

It is the opinion of most economists who have written about this issue that the most important cost to be shifted from the taxpayer to the family should be the costs of student living, where the market is generally more capable of yielding both better and more economical services. In China, where housing and even some dining arrangements are still provided substantially by the universities, and where there are few private housing alternatives, the transition to full-cost pricing of housing and dining is more complicated. Yet the case for the market--its capacity to generate new and better services for fewer resources--is still compelling, and Chinese universities would do well to begin to charge some modest fees for housing, and to aim in the long run for self sufficiency, of such services, perhaps setting up financially-separate, self-sufficient, university-owned housing units competing for the business of the students.

3.a. The underlying costs of instruction. Costs vary by institution, by region of the country (i.e., according to prevailing costs of living), and by institutional sectors or programs, with research universities generally, or advanced study in laboratory sciences, usually costing more. Under a system in which tuition reflected these differing instructional costs, tuition would probably be higher in research universities, medical universities, and in some technical universities than in, say, institutions featuring teacher education or business or more general undergraduate education.

3.b. The level of education. The first degree, or the first year or two of the first degree, might carry a lower tuition either on the assumption that this level can be provided in larger classes, with less costly instruction, or on the assumption that greater private benefits will come from the more advanced degrees, justifying higher tuition at the higher degree levels.

3.c. The interest of the state or of the larger society in the attraction of qualified students into a particular program. Degree programs judged to be of critical social need--e.g. for the preparation of teachers or scientists or healthcare professionals--might be priced at a lower tuition on the assumption that the lower price might attract more and/or better students, and also on the theory that the social benefit to such studies may be proportionately greater than the private benefits.(The alternative, arguably preferable, is to set tuition without regard to presumed social benefit, but then to give financial aid in varying amounts as necessary to reflect differential benefits, or needs, and to make certain that sufficient numbers of qualified students are attracted into these programs.)

3.d. The popularity or market attraction of the program or institution. The more popular the degree program or the institution, the higher the tuition that could be charged, just as with any other good or service being sold in a free market. Clearly, studies in such fields as business or economics or English are very popular and could almost certainly command higher tuition. (Indeed, they now do in China.) The question before the authorities, however, is whether the consequence of this greater attractiveness should be simply to allow these programs to become "richer" and even more attractive, or whether these programs should therefore be given less state support on the assumption that they can make up for that lower support with higher tuition.

3.e. The academic merit or worthiness of a particular student. Several nations, China among them, in the early years of transition from a philosophical and sometimes even a constitutional prescription against tuition, found it expedient to continue the principle of free higher education for students "regularly admitted," but to allow tuition to be charged to those students whose qualifications were just below the qualifying "cutoff"(self-supporting students), or whose places of employment covered the costs of instruction. However, the arbitrariness of the precise line of "cut off," plus the fact that admissions examinations in most countries are notoriously poor predictors of actual achievement in the university (much less, in the students' chosen professions), in addition to the awkwardness of charging tuition to some but not to other student receiving the same education, seem to have lead China, as most other nations that have experimented with a similar system, to abandon such two-track tuition and to move toward a single tuition for all students studying similar programs at the same institution. To the extent that there remains a compelling state interest in rewarding some students more than others in similar programs, it is probably more expedient to charge the same tuition, but to vary the financial aid or the scholarship on the basis of some measure of academic merit.

In most countries, parents are presumed to have an obligation to contribute to the higher educational costs of their children, whether in the form of tuition or support for the costs of student living, at least through their children's undergraduate or first degrees, and at least up to their ability to pay.

5. How much can--or should--be expected to be borne by students or parents or both? What are the limits in China upon tuition and fees, even considering financial assistance to those parents of lower incomes? This question--essentially the appropriate level of tuition and fees--can only be answered in connection with a resolution of the appropriate span of time over which tuition and/or fee payments are to be made, either by parents or students.

5.a. The Parental Expectation and Time. If parents are expected to pay only an amount considered "affordable" from current disposable cash income, then the ability of most Chinese parents to contribute much, given the prevailing levels of annual family cash incomes, will be very limited. In some countries, however, parents are also expected to contribute from savings or other assets. Such an expectation, of course, can generally anticipate a greater overall contribution from parents, although it raises the question of which kinds of assets are, in effect, to be "taxed" for the support of the children's higher education: specifically, whether it is appropriate to expect contributions based on illiquid assets such as land or a home, or on only liquid assets such as savings.

5.b. The Student Contribution and Time. The ability of students to make any significant contribution toward tuition or other costs (absent inherited estates and trusts--hardly common in modern China) will depend almost entirely on the degree to which there are opportunities either to earn money in the current time period, as with a part time job or services in return, say, for housing, or in a future time period: to defer payment, as with a student loan or a graduate tax obligation. In fact, the ability of students to bear a significant portion of costs, depends almost entirely on the acceptance of the appropriateness of student borrowing and the length of time over which repayments are to be made.

9.a. Student loans have been used extensively in Scandinavia, the United States, Canada, and Japan, and have been used unevenly in Colombia, Indonesia. Conventional student loans carry a contractual repayment obligation (monthly, quarterly, or annually) sufficient to amortize the principal amount borrowed at a certain rate of interest (often subsidized by the state) over a specified repayment period. The graduate tax imposes an obligation on all students or graduates in the form of a surtax on income for some specified period, with the amount to be repaid being a function of income or earnings rather than some "principal owed." A student loan with an income contingent repayment obligation is a combination of the two forms, with the present value of the total amount to be repaid being a function of an amount borrowed, but with the amount of each repayment, and thus the duration of the repayment period, being a function of current earnings or income.

9.b Student loans (or graduate taxes) can shift a portion of cost burden on to the student that might otherwise have had to be borne directly by the state. However the true net savings to the state can be diminished by three factors: (1) the effective interest subsidy, if any; (2) losses from default or other non-payment; (3) any costs of program administration borne by the state--that is, not recovered, by the effective interest rate.

Thus, for a student loan program to yield a real shift of cost burden from the state to the student, the following principles should be observed:

• the effective rate of interest paid by the student should be only minimally subsidized; **
• the rate of default should be not dramatically higher than on other forms of small, unsecured personal loans;
• the cost of administration to the state should be minimal.

9.c. Even if a student loan program does not promise an early, substantial shift in the cost burden from the state to the student, a state-sponsored student loan program should still be established, forth following advantages:

1. A program of student loans (or graduate taxes), almost regardless of the present value of their repayments, and thus almost regardless of the degree of real shift in the cost burden from state to student, is an essential part, along with need-based student grants, of a comprehensive policy embracing either tuition or full-cost recovery on student housing and dining.
2. Student loans permit some students--perhaps mainly those who are more able and thus more secure in their anticipation of good jobs after their studies--to borrow more and improve their living standards as students.
3. Student loans permit parents to share more in the cost of university education by assuming some or all of the repayment burden of the student loans of their children; in effect, the student la program can also be a parent loan program.
4. Student loans permit employers to share in the cost of the higher education of their university-educated employees by assuming a portion of student loan repayments.
5. Student loans permit the state to direct subsidies via debt or repayment forgiveness toward students who enter certain professions or occupations or who work in certain regions or provinces.

9.d. Much of the American literature on higher educational finance and policy has claimed great advantage to income contingent repayment schemes, in which the repayment obligation is expressed as the promise to repay a certain percentage of future earnings for a certain period of time, or until the debt has been repaid at a certain effective rate of interest. Proponents claim that such schemes make repayment substantially easier, and virtually eliminate the risk of repayments being utterly unmanageable due, for example, to unemployment or to lower-than-anticipated earnings. Opponents claim that income contingent loans are, in fact, virtually equivalent to conventional loans in their ultimate real cost to the student, even though they are repaid in different ways, and that the appearance of "easier" or "less costly" repayment burdens can encourage the governments to shift more of the burden from the state to the student than is warranted.

For a nation like China, just beginning policies that would shift more of the burden of higher education costs to students, the most important policy consideration is the appropriate division, or sharing, of costs between the state (taxpayers), the parent, the student, and other sources such as enterprises. Income contingency is a useful option for many national student loan programs. But it is considerably more complicated than conventional loans, and it becomes truly important only as average student debts become very large and as long as most income is reported and verifiable--neither of which condition is present in China today. China ought not allow the distracting issue of income contingency to divert policy attention from the more important core issue, which is the appropriate share of higher education costs that should be borne by the student.

The most consistent and verifiable single measure of financial need is probably the income upon which income taxes are to be paid and is therefore known to the state. This may not, however, be the best measure of a family's true need, particularly to the degree to which the family has income that is either not subject to taxation by law, or not subject to taxation de facto by virtue of being largely immeasurable, such as private farm produce, or non-verifiable, such as cash income from private enterprises. In such cases, officially reported income may bear little relationship to true wealth or need. Better estimations of wealth or need for the purpose of determining eligibility for financial assistance may come from such indices as ownership of an automobile, house, farm, or business, or private travel. Some countries have put the determination of "need" and the awarding of grants into the hands of students, on the theory that students probably know the real financial needs of their fellow students, and have incentives to disburse scarce scholarship or grant funds equitably. The potential for abuse and even corruption, however, is very present in schemes that are so judgmental and even political, and institutional authorities may have to monitor so-called "need-based" awards given in this manner.

8. Given that students and/or parents will pay actually pay some net cost--that is, the level of tuition and fees minus whatever grants of scholarships are given--to what degree, if at all, should the basis and worth of the grant or scholarship be determined solely by the student's financial need--i.e. as discussed in the foregoing question--or by some measure of academic merit? And if the financial assistance is to be based on academic merit, is this merit to be based on academic potential, presumably inferred from entrance examinations or from academic achievements in secondary school, or on academic performance in the university, even to the point of having the financial assistance removed (and the student perhaps having to leave his or her studies) for performance that maybe acceptable but less than exemplary?

Most economists of higher education and other higher educational policy analysts recommend that financial assistance be based either on financial need (as discussed in #6, above, however that "need" be measured) or upon the importance to the state of attracting students into particular programs of study (as discussed in #3, above), rather than on any measure of academic merit. The reasoning behind this view is the idea that scarce governmental funds should be used primarily to make a difference--that is, to change behavior or otherwise to accomplish some social purpose that would not come about in the absence of the public expenditure. Financial aid to students on the basis of academic merit is popular with many people and with government officials because it seems to be earned, or deserved. But it is less likely to make a difference. That is, most students who are academically meritorious behave that way not because they may get a scholarship or grant, but because they are highly intelligent, or because they reflect the good values and work habits of their parents, or because, very simply, they know that their academic success will be rewarded later on by good jobs or further study opportunities.

In contrast, financial assistance awarded on the basis of financial need (assuming the need is estimated correctly) makes a difference almost by definition; that is, the student presumably would not be able to attend in the absence of the aid. Similarly, financial aid based on the shortage of students in a particular study program of special value to the state or to society also should make a difference--or else the government may end up not with a shortage, but with a surplus of students in that field, and will know then to discontinue that particular scholarship program.

9.a. Student loans have been used extensively in Scandinavia, the United States, Canada, and Japan, and have been used unevenly in Colombia, Indonesia. Conventional student loans carry a contractual repayment obligation (monthly, quarterly, or annually) sufficient to amortize the principal amount borrowed at a certain rate of interest (often subsidized by the state) over a specified repayment period. The graduate tax imposes an obligation on all students or graduates in the form of a surtax on income for some specified period, with the amount to be repaid being a function of income or earnings rather than some "principal owed." A student loan with an income contingent repayment obligation is a combination of the two forms, with the present value of the total amount to be repaid being a function of an amount borrowed, but with the amount of each repayment, and thus the duration of the repayment period, being a function of current earnings or income.

9.b Student loans (or graduate taxes) can shift a portion of cost burden on to the student that might otherwise have had to be borne directly by the state. However the true net savings to the state can be diminished by three factors: (1) the effective interest subsidy, if any; (2) losses from default or other non-payment; (3) any costs of program administration borne by the state--that is, not recovered, by the effective interest rate.

Thus, for a student loan program to yield a real shift of cost burden from the state to the student, the following principles should be observed:

• the effective rate of interest paid by the student should be only minimally subsidized; **
• the rate of default should be not dramatically higher than on other forms of small, unsecured personal loans; **
• the cost of administration to the state should be minimal.

9.c. Even if a student loan program does not promise an early, substantial shift in the cost burden from the state to the student, a state-sponsored student loan program should still be established, for the following advantages:

1. A program of student loans (or graduate taxes), almost regardless of the present value of their repayments, and thus almost regardless of the degree of real shift in the cost burden from state to student, is an essential part, along with need-based student grants, of a comprehensive policy embracing either tuition or full-cost recovery on student housing and dining.
2. Student loans permit some students--perhaps mainly those who are more able and thus more secure in their anticipation of good jobs after their studies--to borrow more and improve their living standards as students.
3. Student loans permit parents to share more in the cost of university education by assuming some or all of the repayment burden of the student loans of their children; in effect, the student la program can also be a parent loan program.
4. Student loans permit employers to share in the cost of the higher education of their university-educated employees by assuming a portion of student loan repayments.
5. Student loans permit the state to direct subsidies via debt or repayment forgiveness toward students who enter certain professions or occupations or who work in certain regions or provinces.

9.d. Much of the American literature on higher educational finance and policy has claimed great advantage to income contingent repayment schemes, in which the repayment obligation is expressed as the promise to repay a certain percentage of future earnings for a certain period of time, or until the debt has been repaid at a certain effective rate of interest. Proponents claim that such schemes make repayment substantially easier, and virtually eliminate the risk of repayments being utterly unmanageable due, for example, to unemployment or to lower-than-anticipated earnings. Opponents claim that income contingent loans are, in fact, virtually equivalent to conventional loans in their ultimate real cost to the student, even though they are repaid in different ways, and that the appearance of "easier" or "less costly" repayment burdens can encourage the governments to shift more of the burden from the state to the student than is warranted.

For a nation like China, just beginning policies that would shift more of the burden of higher education costs to students, the most important policy consideration is the appropriate division, or sharing, of costs between the state (taxpayers), the parent, the student, and other sources such as enterprises. Income contingency is a useful option for many national student loan programs. But it is considerably more complicated than conventional loans, and it becomes truly important only as average student debts become very large and as long as most income is reported and verifiable--neither of which condition is present in China today. China ought not allow the distracting issue of income contingency to divert policy attention from the more important core issue, which is the appropriate share of higher education costs that should be borne by the student.