International student funding comparisons: Holland and Sweden

The Netherlands



Student support is generous. There are three components: the basic grant, the supplementary grant, and a student loan. All students receive a basic grant, which is independent of parental income, but is paid at a lower rate if a student is living with his or her parents. Students are also eligible for a supplementary grant based on a parental income test. Interestingly, both grants are made initially as a loan, which is converted to a grant if students meet necessary performance criteria, the most important being that they obtain their qualification within a specified duration.

Students are also eligible for a loan, available without an in-come test, on which they pay an interest rate roughly 2 per cent above the rate on long-term government bonds.

Loan repayments
There are two mechanisms. Under the default system, interest is charged on loan and the basic and supplementary grants from the time that they are disbursed (that is, from the first monthly payment in the student's first year). Repayments begin two years after the student leaves higher education. At that time the student's debt is totalled, and monthly repayments calculated such that the loan is repaid over fifteen years on the face of it a straightforward mortgage-type loan. These repayment terms, however, are imposed only where the person has an income above some threshold. A person with a lower income can request to make lower repayments; for very low incomes, repayment is zero.

This process has to be repeated each year. Thus people with income below the threshold make income-contingent repayments. Any loan not repaid after fifteen years is forgiven under either repayment method.

Thus student loans in the Netherlands can be thought of in either of two ways: as a mortgage-type system, with abatement of repayment for low earners; or as a system with income-contingent repayments, subject to a ceiling on annual re-payments. Viewed from the latter perspective, a number of criticisms can be made: the means test is administratively cumbersome; there is no obvious rationale for the ceiling on repayment; and fifteen years is rather short for loan forgiveness (at the other extreme, there could be no forgiveness, with any unpaid student debt a charge on a person's estate at death).

One interesting feature has already been mentioned - the fact that student funding is performance related, in that the grant is treated as a loan unless the student completes his or her qualification within a pre-ordained time. Universities, similarly, face performance-based funding. They receive a centrally determined, flat-rate tuition fee irrespective of subject or university, but beyond that, under a system introduced in 2000, 50 per cent of a university's teaching budget is based on performance measured in terms of completion rates within a specified time period.

On the plus side, these mechanisms create incentives for timely completion for students and universities. On the minus side, they create adverse incentives for universities in two ways: to cream skim by skewing enrolments towards school-leavers, who generally study full time and are more likely to graduate quickly, and to dilute standards of marking at the margin to keep completion rates high.

Total spending on higher education in the Netherlands, 1.3 per cent of GDP, is midway between the UK and USA, and slightly above the average for the European Union of 1.1 per cent.

Sweden



Student support is generous. There is a system of student grants, which meet about 28 per cent of living costs. Students are entitled to a loan for the remainder of living costs. A student is entitled to this package of support for up to six years, but only if he or she maintains at least a minimum level of achievement. Both grant and loan are subject to an income test of the student's income (but not that of his or her parents or spouse). These grants and loans are also available to part-time students, and to students in upper secondary school.

Loan repayments are 4 per cent of the total annual income of borrowers, pro-vided that that income exceeds a minimum threshold. Specifically, the student loans agency collects repayments monthly or quarterly, based on the borrower's income two years previously.16 Interest is computed from the time the loan is taken out. The interest rate is set by government annually (4.1 per cent in 1999). Unpaid debt is written off when a person reaches the age of 65. These arrangements suggest a number of strategic questions.

The first is whether such generous funding is fiscally compatible with Sweden's avowed objective of expanding higher education. Secondly, the 4 per cent repayment rate is proving to be too low, not least because students can borrow for up to six years of study, hence on present projections many students will not repay by the time they reach 65.

For both reasons, reform is on the agenda. One option is to increase the grant element. This approach, it is argued, will not add much to public spending; all that is happening is that an implicit grant, in the form of a loan that is not re-paid, is being converted into an explicit grant. Another option under consideration is to increase repayments by moving towards arrangements similar to those in the Netherlands, whereby borrowers repay one-twenty-fifth of their total debt annually, but no more than 5?6 per cent of their income. Funding universities.

Higher education in Sweden is free for all students. Tuition fees are not allowed.17 University funding is therefore determined almost wholly by government. Expansion has been associated with a drive for greater efficiency. As a result, like the Netherlands (and also Denmark) there is a performance-related element to the amount that each institution gets, based mainly on completion rates.18 The potential adverse incentives this can create were noted above.