Who really bears the cost of education?

by Marie-Hélène Doumet
Senior Analyst, Directorate for Education and Skills


It can be difficult to get your head around education finance. Who actually pays for it, where does the money come from, and how is it spent are all crucial questions to ask if you want to understand how the money flows in education. In many countries, basic education is considered a right, and governments are expected to ensure universal access to it. However, educational attainment has reached unprecedented levels, and more people are participating in education than ever before, leaving governments struggling to meet the demand through public funds alone. The role of private funding has become more significant in the past decade, particularly at the pre-primary and tertiary levels of education. 

But the reality is more complex than a binary public-private model would suggest. Other financing mechanisms, involving the transfer of funds between governments, households and other private entities, are blurring the lines of what is commonly understood as public or private.

Take government-subsidised loans to students. A loan, by definition, needs to be repaid, and so is commonly considered as a private cost to households.  But before that, loans actually come out of the public purse, and so are actually a public cost to governments at the time the loan is issued. The cost, however, shifts to individuals once they enter the labour market and start earning enough to make repayments.  

The latest Education in Focus brief  tries to answer the question “Who really bears the cost of education?” by looking at these transfers as two sides of the same coin.  Separating out transfers from the traditional public-private split of costs also provides more granularity on the sourcing of private expenditure, differentiating what comes in the form of government support from what is truly out-of-pocket costs. 

Consider, for example, two countries well known for their reliance on private expenditure to fund tertiary education: the United Kingdom and Japan. In 2014, both countries relied on private funding to provide around 70% of the cost of tertiary education (when considering the final allocation of funds after transfers). However, two-thirds of that private funding in the United Kingdom comes from government transfers to private non-educational entities, mostly in the form of loans, with advantageous repayment schedules and conditions, to students. This means that while the private sector is ultimately responsible for this expenditure, it is the public sector that bears a significant share of the initial cost, not only of the value of the loan, but also the risk of future default on payments. By contrast, in Japan, only 20% of final private expenditure originated from government transfers, leaving the private sector, a large share of which are households, to fund the rest from their own pockets.  

The chart above shows the extent to which countries balance out public and private funding in tertiary education, and how they compensate for private funding through government transfers to households, students and other non-educational private entities. Interestingly, some countries with the largest share of private funding in education provide the least financial support as a share of total private expenditure. This is the case in Chile, Japan, Korea and the United States. By contrast, countries such as Belgium, the Netherlands and Slovenia cover a large share of private expenditure through public-to-private transfers, and households bear much less of a financial burden. In between the two models, countries such as Australia, New Zealand and the United Kingdom rely on public funds to unlock private ones.  A strong financial support system, mostly structured on publicly subsidised loans, lightens the initial high cost of education for individuals, but allows graduates to repay the loans when they are most able to do so.    

Central to the idea of who should bear the cost of education is the philosophy behind who actually benefits the most from it: the public or the individual. Primary and secondary education are generally considered as a fundamental human right to basic skills that should mostly be provided by governments, which, indeed, is often the case. However, the earnings premium provided to higher education opens the debate as to who benefits the most from higher education and therefore, who should be paying for it. But thinking mainly in terms of public or private spending misses an essential element: what happens behind the scenes in the form of public-to-private transfers. Understanding these financial transfers provides insights as to how the cost of education shifts between the public and private sectors over time, and sheds some light on a sometimes overlooked measure of education finance.  

Links
Education Indicators in Focus No. 56: Who really bears the cost of education? How the burden of education expenditure shifts from the public to the private sector
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