I thank the committee for inviting us to speak this evening. I understand that the process has been lengthy for the committee and that this is an indulgence on members' part to hear more evidence. At the outset, I praise Mr. Peter Cassells and his team for their work in highlighting and developing the consensus that now exists on the crisis in higher education funding. I also praise the National Economic and Social Council, NESC, Professor Chapman, Dr. Doris and Dr. Flannery for their contributions towards the thoughtful analysis of the report and subsequent discussion.
My co-author, Dr. Corbet, will discuss the impact of securitisation in the UK and New Zealand and examples from the rest of Europe. At the outset, I will set some context before examining the ICL structure and a number of issues relating to the Exchequer. Throughout this discussion, I would like committee members to think about the question of who they find to be the most important in this exchange: the student, the educational institution or the Exchequer. Each has a stake in this and each could wind up holding the cost, not holding the cost or being risk-free in the process.
Begging the committee's indulgence, I will start with a quote from Financing Higher Education Worldwide: Who Pays? Who Should Pay? by Professor Bruce Johnstone and Dr. Pamela Marcucci. Professor Johnstone of the State University of New York, SUNY, is a co-author of Professor Chapman's and has a useful way of framing the conversation. He writes:
income contingent loans would seem to be less applicable when:
... non-governmental revenue is needed [immediately], making the parental contribution to tuition (even with [some] discounting [and excluding amounts for low-income families]) [an important] source of needed revenue supplementation.
The scarcity of governmental revenue precludes government from being the sole lender (which places a premium on student loans that have some--albeit discounted--value on the private capital market).
[Many graduates] (borrowers) are likely to hold multiple short-term jobs, to be employed in the informal economic sector, where records are most unreliable, or to be emigrating.
There is no tradition of voluntary, reliable self-reporting of incomes, and state systems for monitoring and verifying incomes for the purpose of income tax withholding and/or pension or social security contributions are non-existent or unreliable.
That is a useful way of beginning to frame the conversation. We have to look at this as a question of income-contingent loans per se. There is ample evidence that they are a very effective and equitable way of dealing with the problem of financing education. We also have to look at the issue from the point of view of Ireland. In the Irish context, many of the things that were outlined by Professors Johnstone and Marcucci are clearly present.
That brings us to part of the foreground of the background, namely, cost. We have to decide what education is for. Is it fit for purpose? What are we asking the system to do? Costs are increasing. This is partly due to the increased rate of participation in the sector. It is also due to the burdens of mainstreaming the cost of research, which is typically subsidised from teaching income. As institutions become more financially strapped, and it is very clear that, especially in the institutes of technology sector, this is going to be imminent over the next five years, the system of education switches its purpose from developing individuals, the economy and society to sustaining itself and maintaining operations. This is where politics comes in, the decision-making that has to be done with respect to the social planning aspect of higher education.
Now that we have talked about the foreground, let us set the scene. To use the philosophy of the late great New York Yankee Yogi Berra, "The future ain’t what it used to be". In the United States, there is $1.2 trillion in student loans and no higher education institution in America has any skin in that game. They have received the money upfront. The risk is borne by the student, the financial system and the state. That brings us to the possibility of earning. Going to college is a very good idea if one wants to earn but, in the US, 56% of 22 year olds are underemployed. That only improves to 40% by the age of 27. When we begin talking about Ireland, we have a serious problem of education mismatch. Profiling different parts of the education system, we note that the mismatch becomes quite acute when we talk about arts students. Seamus McGuinness of the Economic and Social Research Institute has showed that the education-labour market mismatch has reached a height of 33%, one of the highest in Europe. Ireland is not alone. The same circumstances exist in the UK. Baroness Wolf, in her report Remaking Tertiary Education, published last November, highlights this as a major problem for its system.
We also have to look at the other aspects of the economic conditions around us. Last week in its world economic outlook, the International Monetary Fund highlighted a general reduction in labour income as a proportion of overall output. This finding is supported by Professor Robert Gordon. The proportion has been declining since the 1970s. Part of this has to do with the fact that advanced economies have had a particularly sharp decline in middle-skilled labour. Routine, advanced abstract thinking jobs are disappearing, for example paralegals and junior solicitors. Those jobs are being replaced by algorithms and these are the people we expect to be earning enough to repay student loans. The response to this has already been clear in the US. They have been moving from a "K through 12" – kindergarten through to age 12 – system to a "K through 14" model. The idea is that universal level 7 higher education is going to become a reality in the city of Chicago within the next two years.
We have certain particular Irish problems. One is the level of dropouts. One in six third level students drop out, increasing to roughly 26% when we begin discussing the institutes of technology. We also know that there are great information asymmetries and uncertainties built into the system. There are deep information asymmetries on the part of the student with respect to the educational product and the labour market. In the US, there is strong evidence that even when students overcome these asymmetries - 60% do not - they overestimate their salaries by 13%.
Finally, there is the matter of cycles. According to the latest estimate by the IMF, advanced economies will experience a significant economic shock to their fiscal system of approximately 9% of GDP every 12 to 18 years. That means an event such as the recession of the late 1980s or the one we just went through, with the IMF-EU-ECB bailout, will not be an occurrence that happens once in a human lifetime but will be experienced several times in the lifetime of any given graduate or person in this room. Those who survived 2010 had better build a survival kit because it will happen again.
That brings us to what happens with the student. We will call our examples "Sean" and "Maura". Sean is located in Dublin and is studying a finance course at one of the universities there. He intends to go off to the City of London and become a high earner. He has limited desire to return to Ireland. He also lives at home. From his point of view, the income-contingent loan covers his fees. He will go off to his high-earning job and his ability to repay will be based entirely upon his compliance with the Irish authorities when he is away from home. In addition, the major cost of his education, approximately €13,000 per year, will be accommodation and living expenses, which are now covered by his living at home.
Maura is going an institute of technology and comes from a somewhat poorer background but does not qualify for a grant. She has an income-contingent loan. She has a desire to do social studies and wants to become a social worker. It is a decently paid, solid job but it is not highly paid. She goes into the workforce and will eventually pay her income-contingent loan because she is in the Irish tax system. As a PAYE worker, she has no escape. If there is a crisis and her income drops by 20% or 28%, as happened during the recent crisis, it will become more difficult. This is before we discuss her leaving the labour market for brief periods to have children.
That gives a picture of some of the complexities that will need to be worked out in legislation, statutory instruments and regulations in order to make an income-contingent loan system work in Ireland. This is before we begin to discuss the issue of the student experience and whether what we are providing as higher education is fit for purpose. We are fixated upon trying to pay for it but have not really asked if the students are getting the best deal. Is the quality still there? We know the system is in crisis and, if it crashes, there will be a massive reputational effect for Ireland from which it will be difficult to recover. Throughout this conversation, however, we have not really asked if we are creating an appropriate higher education system that will work for the 21st century.
From the point of view of the institutions, we know that this system will not be capable of funding capital expenditure. The solutions that have been found in income-contingent loan systems such as the British one have relied on the capital markets. In Britain, they have also relied on the Bank of England to provide support in that context. We know that rankings require much more money than an income-contingent loan system could provide. At present, the best universities in Ireland, on an income-per-staff-member basis, still have half the income of those against which they are competing in the United States and under a quarter of those in Asia.
We must then look to the Exchequer. Not only does it have to finance this in advance, it also has to find a means for cost recovery. Dr. Corbet will focus on the securitisation process, which is crucial if Ireland is not to wind up financing this entirely itself. Ireland has very limited headroom. Part of the process that has taken place since the crisis is a move towards fiscal stress tests. They work tirelessly to remove contingent liabilities from the State's balance sheet. That is the case that would exist with income-contingent loans, which is why Dr. Corbet and I have looked at this.
Within our analysis, we have found that only 38.5% of the loan profile is of investment grade, subject to securitisation over a 20-year time horizon. In order to make the system effective, one would have to keep the default rates below 15%, institute a minimum payment cap of €2,000 per annum, and keep an interest rate between 7% and 8% over baseline sovereign rate. One would have to have an EIB loan or a special purpose vehicle generating roughly €600 million to €700 million per annum and overall it would generate €7 billion in net losses until it reaches a point of stabilisation in year 18. If one wants to do that faster, one will have to increase the interest rates to more than 10% and drop the default rate to zero. Ultimately, the interest rate is paramount in the system because of continuous compounding. It has a damaging impact on inequality since it will place those in the €25,000 to €35,000 income bracket into a debt spiral very easily.
It is also important to note that wider issues of access and inequality are structural. They require investment in the earlier years of education and in other components of the education system. To entirely look upon the higher education system for the solutions is essentially looking for a plaster. Our research has found that approximately 50% of graduates would be unable to pay the full net present value of the income-contingent loan over a 20-year time horizon. We can only be sure that approximately 31% will pay entirely.
On the matter of reporting, which was mentioned at the outset, in the United Kingdom the Student Loans Company has an operating budget of £138 million and it dedicates £15.7 million of that every year to fighting fraud. For those in that system who are abroad, a full 41% of them are either in arrears or uncontactable so the cost of administrating that becomes rapidly very expensive. Also, in New Zealand they have had to resort to the criminal code in order to ensure compliance on the part of those who owe income to the New Zealand system, in certain cases going as far as arresting people at the airport.
Overall, our research shows that income contingent loans are a risky course of action. They have the potential to create large contingent liabilities for the Exchequer and would modify significantly the social planning objectives that have been worked out between the Government and the higher education institutions. If income contingent loans were investigated, it could very quickly become the case that cost recovery becomes the principal objective of the higher education system and issues of equity, social policy and the higher objectives of education will become secondary. Overall, they would not provide the €5.5 billion in capital expenditure required for the capital deficit that still exists in the higher education space. The Government would need to propose substantial legislative changes not only on the accounting side in institutions, but also create a loan company and a loan recovery system and it would be of the complexity and the cost of something along the lines of the Legal Services Regulatory Authority.
These conclusions are based upon evidence but they also indicate that further investigation is required. Many of the decisions lie in the political system and those decisions of social planning relate to the setting out of the parameters that the system will operate under and that changes the model substantially. Ultimately, the political system has to give us guidance in order to model it in a way that is effective.
Income contingent loans in our views are only one part of what would have to become a suite of different solutions to a deep and wide-ranging problem in the higher education sector. Taxation, increased student and family involvement and income-contingent loans, in addition to other dead instruments, would all have to be used in concert in order to solve what are very serious and in many ways intractable problems.
At the end of the day higher education has to be paid for and there are only three options: the student, firms and the Exchequer. In all circumstances it is about revenue and not debt, as debts ultimately have to be repaid by revenues generated by income, profits or taxes. In conclusion, the view is that, first, we must decide what type of higher education system we want and then we can decide how we can finance it. I will now hand over to Dr. Corbet to discuss the complexities of that.
